The Feds raised the interest rates by .75% this week. That’s not good news, especially as it comes on the heels of May’s .50% increase. Another Federal Reserve meeting is scheduled for the end of July and economists predict interest rate increases again before the end of the year, by as much as 1.75%.
Why is the Federal Reserve raising interest rates? The reasoning behind the decision is that higher borrowing costs will slow the rate of inflation by curbing demand.
Federal Reserve Raises Interest Rate by 0.75%
Economists call it a “trickle-down effect” but for small business owners, it may be akin to a deluge. There are two main ways rising interest rates affect small businesses: The higher rates affect the businesses and the higher rates affect their customers.
The Effect on Small Businesses and Customers
Trickier Credit Navigation – Many business loans have variable rates and monthly payments will become higher. As a result, vendors’ confidence, as well as vendors and suppliers may be more cautious about extending credit to small businesses, thus developing different terms for repayment.
- Credit Card Rates – The interest rate on your business credit card may increase.
- Customer Caution – Customers may pull back on discretionary spending, especially for luxury items and services.
- Customer’s Thinner Wallets – Just as small business owners are feeling the pinch, so are their customers. All are faced with much higher costs for gasoline and fuel oil. The inflation rate for food and other necessities is approaching 5%.
- Senior Customers – Seniors who are on a fixed income will have to economize and cut costs to keep up with inflation.