Why Business Loan Interest Rates Are So Important
In business, interest rates are an important consideration when making any financial decision. A rise or fall in the rates has an impact on your business activities. When you borrow money, you will be charged interest on the amount borrowed. Anytime you have extra cash and invest it; you will receive interest. Similarly, when customers buy your good or services on credit, you will charge them interest.
It doesn’t matter how prosperous your company is, interest rate fluctuations have a significant impact on your business because it affects consumer spending. You can take advantage of the changes and carry out expansion activities when the rates are favorable and hold back when they are high.
Effects of high-interest rate on the cost of borrowing
Business loans come at a cost. When you choose debt financing as a means of injecting more capital into your business, you will have to pay interest to the lender for using their money. A higher interest rate means you will have to pay more and this will eat into your profit hence slowing down growth. Businesses tend to borrow less when the rates are high because the costs of borrowing at such times are at the roof tops making it unprofitable.
A lower interest rate means that the cost of borrowing will be much lower. When the rates are low, it means that the banks have a lot of cash that they are willing to lend out to businesses or individuals. If the banks charge lower business loan interest rates, many companies will expand, and the cost of doing business will be much lower.
Consumers will also find it easy when purchasing goods and services because the cost of production and manufacture will be much lower. During such times, many consumers will take advantage and clean out their credit card debts since they don’t have anywhere to invest their money to earn interest.
Impact of interest rates fluctuations on consumer buying habits
For your business to stand or grow, it needs customers. Interest rates have an impact on consumer purchasing power. Customers tend to spend less when the rates are high. This happens when they also have loans to pay. They will have very little income at their disposal to use since the higher rates will have taken a big chunk of their earnings.
Customers’ purchasing power will be at its peak when the rates are lower because they would have paid their loans and remain with some more to spend. This means that your business will grow and flourish during such times.
How fluctuations in interest rates affect banks
Banks make money by giving out loans to businesses or individuals. When the rates are high, it means they will make more money on the borrowed funds. They tend to lose on their profits when the rates fall. During such times, many business owners will withdraw their cash to buy new equipment, expand their business or pay off their debts. The banks will not have enough money at their disposal to loan out to the customers.
How businesses can take advantage of interest rates fluctuations
As a business owner, you should always be on the watch for the business loans interest’ rates cycle. When the rates are lower, expand your business and hire more employees. You will be able to pay them a higher salary meaning there will be a lot of money at their disposal. If consumers have money, they will buy goods and services attracting more sales that will make your business grow.
When there is lots of money in circulation, the government through the central bank will increase interest rates meaning that the cost of borrowing will be much higher. This is just a measure by the central bank to regulate the money in the economy. During such times you can put off your expansion objectives as you work with the limited cash at your disposal.
Business requires tact. You should always be on the look for changes in the economy because it has a way of boosting your business or holding it back.
Not sure how business loan interest rates can affect your business? Call us today and let one of our experts explain it to you.