Interest rates have a great significance in the performance of businesses, and how well they are likely to operate after start-up. As an entrepreneur, you need to be keen on interest rate trends to get an idea of when to borrow and when to hold a little bit longer. With rising interest rates, various impacts are likely to be felt on enterprises.
Interference in Business Planning
A rise in interest rates has a significant impact on the profitability of a business. When banks charge higher interest rates on loans given to enterprises, small businesses with loans set at a fixed rate may not feel the impact. On the other hand, huge companies that owe loans to banks with fluctuating interest rates will feel the impact of having to pay more than initially planned. An increase in interest rates affects the whole business plan and forces the business owner to get more money from profits to service the loan.
Limited Cash Flow
An increase in interest rates has a great impact on small businesses that run on limited cash flow. Small and developing businesses need additional funds to repay their loans, money that would have been used to expand the business. These businesses may also find it hard to pay their receivables and may end up putting off their investments until the loans are fully repaid.
High Cost of Borrowing
Businesses that need to expand or those that need to acquire loans for startups may find it hard to borrow from banks. Increased interest rates dictate the amount of profits that an enterprise will record at the end of the financial year. A new business that has not mastered the art of trade may end up closing sooner than expected due to the pressure of servicing their loans.