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The Impact of Rising Rates and Inflation on Your Business
As a business owner, thinking about the economy is part of the job. Inflation, recession, job growth, wages, etc., all factor into how you do business. Lately, the rise in federal interest rates is a hot topic and you may be wondering how this will affect your business.
The Fed has been increasing rates on a regular basis in 2022 to cool off inflation and slow down the economy to a more manageable level. When federal interest rates are high, it becomes more expensive to do things like borrow money or carry debit. In turn, this can decrease consumer demand, bringing prices back in check and alleviating strain on supply chains.
Let’s take a look at how this can impact you and your business.
Increased Cost of Borrowing
For the last few years, interest rates have been at near all-time lows, mostly to help soften the economic impact of the pandemic. Just look at the housing market and the demand for cars—lower interest rates spur purchase and consumption. It also drives inflation, which is why the Fed wants to pump the brakes.
When it becomes more expensive to borrow money, demand is cooled, and inflation may slow down. But it also means that businesses’ ability to borrow is diminished. Businesses often rely on borrowed money from loans, credit cards and lines of credit to help finance their growth. Large purchases such as new equipment or real estate, or long-term upgrades and investments may be put on hold due to higher interest rates. Payments on current variable rate loans will also go up.
Higher rates can also lead to loan applications being reviewed with greater scrutiny. Because it costs more for financial institutions to borrow money from each other, lending standards become more stringent. Having a good relationship with your lender can ease this process. That personal connection builds trust on both sides: your lender trusts you to fulfill your financial obligations, and you trust your lender to better understand and help with your long-term financial needs. Citadel functions on a philosophy of “Building Strength Together” for all our members, both business and consumer. Get to know us and let us get to know you.
Increased Cost of Operation
It’s no secret that rising interest rates affect more than just loans or credit cards, cascading through the economy in the form of increased prices for goods and services. Costs for raw materials and supplies are climbing, and lead times are getting longer. Wages and healthcare costs are also on the rise, and offering competitive wages and benefits is crucial to retaining your employees. Even where you do business is affected by rising real estate prices and rents.
As a business owner, you may be faced with a tricky balancing act between absorbing these costs to avoid increasing prices and driving customers away, and still maintaining a profitable business capable of growth. It may be time to take an in-depth look at your business and search for ways to reduce costs and streamline operations that could help your business save some money each month.
Cash Management Challenges
Rising interest rates on your loans can diminish your cashflow, as your costs go up and the dollar amount on loan payments increases. This can lead to less day-to-day cash stability and reduce the ability to invest in long term growth. Citadel provides a suite of Cash Management Solutions to help you navigate these challenges.
If you’ve been able to keep some cash on hand, you may be able to ride out these interest rate increases. If you’re a newer business owner that may not have that cash or enough data to plan for economic ups and downs yet, you may want to proceed with caution until the market levels off. Talking to our business team can help you make the decisions that are best for you and your business.
Inflation can also make it difficult to build up cash reserves, so it’s wise to have a plan to set something aside whenever you can, easing potential bumps in the road. Small amounts add up over time, and once you have accumulated some savings, our financial experts can show you how to maximize those funds with investing and wealth management tools geared for business.
Changes in Consumer Behavior
Interest rates affect everyone eventually. This includes your customers, who are likely to spend less when interest rates are higher and their cost of credit and borrowing goes up. Businesses based on financed products, such as equipment, real estate, or vehicles, may find their customers hitting pause on purchasing. Your customers could be having the same challenges obtaining credit as lending standards tighten. Services dependent on more discretionary spending, such as luxury products, dining out, or marketing services, are also prone to changes in consumer demand as customers cut back on optional spending. As a consumer yourself, think about how your own personal finances have been affected over the last several years and how it has changed your spending priorities.
Businesses based on non-discretionary spending, such as medical, dental, and veterinary practices need to keep pace with what consumers want and need, and that requires investment. Expanding service offerings, adding new products, and hiring additional staff to meet these needs come at a cost. Maintaining the standards your customers have come to expect while continuing to grow your business can put a strain on finances, but Citadel’s highly competitive business loan rates can give your room to breathe.
The Upside?
Rising federal interest rates can take months to move through the economy and the effects aren’t always immediately predictable. Now is the time to take another look at your business, determine where you can streamline costs and find opportunities to secure the future. Your business will be better prepared to face small downturns and economic changes.
And if you do have available cash in accounts that aren’t doing much for you, these rising interest rates mean there’s more competition for your money.
The average bank savings rate is now just 0.11%, up from 0.06% in January, per Bankrate.com. The average rate on a one-year CD is 0.51%, up from 0.14% at the start of the year.
Citadel is committed to serving our members by offering higher rates and increasing them as benchmark rates increase. This could mean greater returns on things like Business Money Markets and Business Certificates (known as certificates of deposit or CDs at other financial institutions). While you shouldn’t expect a windfall of cash, it can help offset additional costs and allow you to further invest in your business future.
What Can You Do?
Smart businesses owners know they need a financial institution they can depend on and trust. Banking is a vital part of any business, from a one-person operation to a multimillion-dollar medical group. Without a good understanding of finance and professional help, things can be much harder than necessary.
That’s why Citadel’s Business Banking Team is here for you and your business. We’re trusted advisors, helping you navigate your business’ financial needs. We can provide sound financial advice on:
- Structuring debt and borrowing money
- Business loans, credit cards, and lines of credit
- Debt consolidation and refinancing
- Smarter spending, cost reduction and managing cash flow
- How to benefit from rising rates
- Money management resources
- Achieving revenue goals
- Planning for anticipated demand and continued shortages
If rising interest rates are impacting your business, talk with us. Over the past two years, shutdowns, operational changes, and changing local conditions have likely affected you personally and your business. Talking about and facing those challenges, both internal and external, is much easier when you have a good relationship with your financial partner.
Sure, you could manage a lot of this on your own with some basic accounting and investment. But we want you to be able to do more than just manage. As experts in our field, we’re deeply connected to our community, and we’re here to help you thrive and grow. Let our knowledge and networks work to your advantage. Focus on what you do best, and our team will provide the financial tools and expertise to support you.
Helping you sustain and grow your business helps us sustain and grow ours, and together we all benefit.
