Negative impact of higher interest rates on business


Running or starting a business brings within its purview so many things and aspects which every entrepreneur has to take into consideration. Right from developing a business idea or a concept to locating the place of operation, hiring personnel to bringing in as well as managing your finances, there are almost infinite things to consider.

Besides these, there are also many bigger issues and challenges which an entrepreneur has to deal with. These involve making a deep study of the economy, how open or closed it is for entrepreneurship, and the role of financial institutions like banks, their rates of interest and such other factors. Considering the role and importance of banks and other financial institutions in the area of business, this blog aims to throw light on the negative impact of higher interest rates on business.

Impact on business planning

When there is an increase in the rate of interest which is charged by banks for loans and advances, businesses tend to suffer, especially the smaller ones. Situation becomes more difficult when the loan which you have availed of is on floating interest rate, meaning that any rise or dip in the interest rate shall have an effect on the loan or advance so taken.

Similarly, when there is a rise in the rate of interest, the terms or repayment especially the installments become bigger and more difficult to repay and this shows a slightly downward curve in the overall profitability of the business. When the profits are low, the company becomes incapable of engaging itself in any further research and development and/or innovation etc.

Thinner cash flows

A stable business has to have a steady cash flow statement. Depending upon the size and nature of the business, cash flow amounts may differ.  For smaller businesses, the cash flows required to be maintained are comparatively low. Hence, in the event there is a rise in the rate of interest, some portion of the cash flows goes as repayment of installment of the loan which may be taken by the business. This reduction in cash flow may put a pinch on the business which may force the business to postpone their plans of expansion and/or innovation, if any.

Customer’s saving and spending habits

Today many people avail loan or advance facility, either to buy a house or car or for satisfying some or any of their needs. The impact of the rise in the interest rates on such consumers is such that the amount which they used to allocate for their personal spending will reduce since a bigger chunk of their income will go towards repayment of the loans so taken by them.

This will make them postpone certain purchases which might affect the sales of your products, thereby affecting your business. Moreover, if there is an increase in the rate of interest for savings, then this increase shall act as an incentive for people to spend less and save more which in turn shall again affect your business.

As a prudent businessman or entrepreneur, it is very important that you keep a close track of all such changes happening around you so that you will be well prepared to take decisions in spite of such fluctuations.