The federal funds rate is at a record low. Since the beginning of 2020, the U.S. Federal Reserve has kept it around 0% to 0.25%. With a record-low federal funds rate, you can expect similarly low interest rates when applying for loans and other forms of debt-based financing. As a business owner, though, you might be wondering how interest rates will affect your business.
How Interest Rates Affect Your Business
What Is the Federal Funds Rate?
To better understand how interest rates impact your business, you must familiarize yourself with the federal funds rate. The federal funds rate is a universal interest rate set by the U..S. Federal Reserve. It determines how much interest banks must pay when borrowing money from other banks.
Approval for Loans
When interest rates are low, you’ll have an easier time getting approved for business loans. A high federal fund rate will cause banks to increase their interest rates on loans. Assuming your business already has a loan with a variable interest rate, it will take longer and cost more to pay off. As a result, you may struggle to get approved for new loans.
Cash Flow
Interest rates will affect your business’s cash flow. Low interest rates will typically have a positive impact on your business’s cash flow by increasing it, whereas high interest rates will have a negative impact on your business’s cash flow by decreasing it. Cash flow is an accounting metric for the amount of amount that comes into and goes out of your business. With high interest rates, more money will leave your business in the form of interest on loans and borrowed funds.
Credit Card Fees
The federal funds rate is closely connected to credit card interest rates. When the federal funds rate goes up, so do interest rates on credit cards. Assuming your business uses credit cards to buy products or services related to its operations, your business will face higher interest fees. Conversely, low interest rates will result in lower interest fees on credit cards.
Sales
No matter what type of business you operate, interest rates will probably affect your business’s sales. Most businesses sell their products or services to either consumers or other businesses. The former are known as business-to-consumer (B2C) companies, whereas the latter are known as business-to-business (B2B) companies. When interest rates are low, businesses and consumers alike will have less money. As a result, B2C and B2B companies will typically generate fewer sales and less revenue.
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