Interest rates are like the heartbeat of the economy. They influence everything from mortgages and car loans to credit card balances and business investments.
For companies, changes in interest rates can have significant implications for financial health and operations. We’re going to highlight some of the key points below in good ol’ plain english.
We’re doing our bit to pass on our knowledge — seek professional financial advice for more in-depth analysis about your scenario.
1. Increased Borrowing Costs:
When interest rates go up, so do the costs of borrowing money. This means that if you need to take out a loan to finance expansion, purchase equipment, or manage cash flow, you will now have to pay higher interest rates on the borrowed amount.
These increased borrowing costs can lead to higher expenses for your company, which can potentially impact your profitability and even your short term cash-flow.
2. Impact on Debt Repayments:
If you already have existing loans or debt, you will now face higher interest payments on those obligations. This means that you will have less money available to invest in your business, or undertake other growth initiatives.
If you’re heavily indebted, rising interest rates can become a burden, making it challenging to manage ongoing financial obligations.
3. Effects on end-consumer Spending:
Higher interest rates can also affect spending patterns. When interest rates rise, borrowing costs rise, making it more expensive to finance big-ticket items like houses, cars, and other goods. If your customers are consumer facing, they may see demand for their product soften.
This isn’t dissimilar to business spending. If you’re using credit or debt to finance some of your larger expenses, this is now more expensive. You should take a look at alternative finance products.
4. Impact on Stock Market:
Rising interest rates can also influence the stock market. As borrowing costs increase, companies may experience a slowdown in their earnings growth, leading to potentially lower stock prices. Investors might become more cautious and reevaluate their portfolios, causing fluctuations in the stock market.
A lot of Venture Capital money comes from public institutions, pension funds, HNW’s and institutional investors closer to the source. So if you’re raising a VC round or rely on VC money to support your cash-flow and operations, this money is more expensive for them too, so there could be an added level of caution and sluggishness if they haven’t fully raised their fund.
5. Currency Fluctuations:
Interest rate changes can influence exchange rates. If a country’s interest rates rise relative to other countries, its currency may strengthen. This can affect companies engaged in international trade as their export competitiveness may be reduced, while import costs may increase.
If this is the case and you rely on overseas suppliers of any kind, your pound may not go as far as it did before, meaning those services are now more expensive and it chips away at your margin if you’ve got or are seeking international customers.
In conclusion, a rise in interest rates affects everything in a different shape or size and has a knock on effect up and down the financial chain.
There are a few ways that you can minimise your exposure to rising interest rates:
- Pay your credit cards in full every month. Simple advice, but important if you can. Interest compounds and before you know it, you need to sell your left kidney and your dog.
- Improve your cashflow — as patronising and ‘no-shit-sherlock’ that sounds, it’s true, but when a SaaS co gets VC funded, cash-flow isn’t always the first priority.
- Sell more annual plans, get paid higher balances upfront to support your cash-flow, reduce your reliance on outside capital (credit / VC). Give your customers an incentive to pay you for a year & make it affordable for them too. Help your customer help you.
The video below is a really good 30 minute explainer by Ray Dalio that explains more about how interest rates affect the economy.