Learning Center/Business Resources

Interest Rates 101: A Business Owner’s Guide

Two things are certain in life: death and taxes. Notice there’s no mention of interest rates? That’s because they are anything but certain, as there are a variety of complicated factors that go into the Federal Reserve’s decision to raise or lower rates. Generally speaking, rates rise when the economy is strong, there’s low unemployment and inflation is healthy. It’s important to know what this means for you.

There are two kinds of rates:

Short-term rates – which typically last for less than a year
Long-term rates – which generally last two-plus years

Just because short-term rates rise doesn’t mean long-term rates will go up as well. A Federal Reserve interest rate change primarily impacts short-term rates and short-term credit, so borrowing can become more or less expensive depending on the direction of the change.

Adjustable-rate loans and lines of credit can be impacted by rate changes, which will influence your business in terms of the cost of your monthly payment. This means business loans can get more or less expensive and business credit card rates could change as well.

As a business owner, you should have one eye on interest rates and the other on your banking accounts to ensure you understand how an increase or decrease will affect your business plan. This will help you plan how much access to capital you think you might need to grow your business and repay your debts while having enough cash on hand for the day-to-day operations.

It’s important to fully understand the rates and terms of your financial accounts. For instance, you may have a line of credit with an adjustable rate that will tick up as a result of a rate increase. If you have fixed-rate loans, interest rate increases or decreases will not result in any immediate changes, but you do need to know when your fixed rate expires.

Meet with your banker or financial advisor to go over all of the products you’re in and the current rate(s) you’re paying. Here are a few more things to think about to protect your business in a changing rate environment:

If you already have fixed-rate loans, make sure you know when the rate matures. Is it five years or 10? Determine at what point you need to refinance the loan or extend the maturity date and decide if you’re comfortable with that strategy.
You can choose to refinance an adjustable-rate loan to a fixed-rate loan before it matures which will keep the rate steady regardless of environmental changes.
If you need access to cash to pay bills or cover employee salaries, it may be time to lock in a fixed-rate loan, but make sure the choices you are making are in line with your business needs and not in reaction to the market.
Pay attention to your borrowing costs and weigh your needs. During the past 15 months, rates have risen and will potentially continue to rise. Business owners must weigh the cost of the funds with the potential for future return in order to make an informed decision.
Pay attention to any writing on pre-payment penalties. In some cases it could be more expensive to pay off your loan early or to than staying in your current product.