The Federal Reserve has rolled out several interest rate increases since 2022 to combat rising inflation. This can be a tricky environment to navigate for small business owners. The good news is the team at United Bank is here to help you reach your goals, even in times of economic uncertainty. Small businesses can be more susceptible to potential economic fluctuations, which is where we come in.

We are going to break down what these rising interest rates could mean for your business and how you can stay on track to make your dreams a reality.

By setting interest rates, the Federal Reserve dictates the cost of borrowing money across various sectors. As the economy gains strength, the Federal Reserve typically responds by increasing interest rates to stave off the risk of rampant inflation. Conversely, during economic downturns, the rates are lowered to fuel borrowing and encourage consumer spending.

Higher Borrowing Costs

The immediate and perhaps most palpable effect of rising interest rates is the elevation of borrowing costs for small businesses. Financial institutions mirror the Federal Reserve's decisions by resetting their own interest rates, directly impacting you, the borrower. This upward shift can translate into higher monthly payments with variable-rate loans, effectively tightening cash flow.

Reduced Loan Affordability

Small businesses are often highly reliant on loans to sustain their operations, spur expansion, and foster innovation. As interest rates rise, the affordability of these loans decreases. As a business owner, you may be confronted with the challenge of securing sufficient capital or may be compelled to reassess your borrowing strategies, potentially stunting growth initiatives.

Refinancing Concerns

The impact of rising interest rates isn't confined to new borrowers. Businesses with existing loans may find themselves grappling with the complexities of refinancing decisions. Entrepreneurs aiming to refinance to capitalize on lower rates might be confronted with a stark reality: the gap between their current interest rate and the new rate has widened, potentially eroding the financial appeal of such a move.

Fortunately, there are options that help your business thrive even in tough times. Here are some ways our team recommends navigating rising interest rates.

Evaluate Loan Structures

You should meticulously explore loan structures and gain a comprehensive understanding of terms and conditions. Opting for fixed-rate loans can provide a measure of stability in times of volatile interest rates. These loans maintain a constant interest rate throughout the loan's lifespan, providing a hedge against uncertainty.

Strengthen Financial Management

Taking a proactive stance toward financial management is crucial. Establishing and maintaining a robust cash flow, along with ample reserves, can serve as a cushion against the burden of elevated borrowing costs and economic uncertainties.

Explore Alternative Financing

Not all financing avenues are equally affected by rising interest rates. You can consider alternative routes such as grants, crowdfunding, or equity financing, so you’re less reliant on loans to mitigate the effects of heightened interest rates.

Negotiate with Lenders

Open communication with lenders is pivotal. In the face of rising interest rates, you should have constructive conversations with your lenders. At United Bank, our team works closely with business owners to help them find the plan that works best for you and your goals. This could entail negotiating for more favorable terms or exploring the viability of fixed-rate loan options, which can serve to stabilize loan repayments.

Adapt Growth Strategies

Adapting to evolving financial landscapes is a hallmark of successful entrepreneurship. Despite rising interest rates, strategic changes can help businesses continue to grow. This might encompass diversifying revenue streams, streamlining operations for optimal efficiency, and maintaining a relentless focus on productivity. Our team also offers business services, treasury management, and additional resources to help you and your business grow. Visit United Bank’s lending services page for more information. 

While small business finances are always changing, the influence of economic forces is almost always out of your control. As the Federal Reserve raises interest rates, you need to take careful consideration and proactive measures. Also, having a financial team you trust is a great way to understand and stay ahead of changing economic landscapes.

While challenges are certain, if you remain well-informed, adaptable, and committed to cultivating robust financial practices, you will undoubtedly be better poised to handle the impact of mounting interest rates on your loans. By staying strategic and resilient, you will emerge stronger, securing your business’ long-term success.

Questions? Visit or call your local branch and talk to a business and lending expert about navigating rising interest rates.

Sources:

https://www.businessnewsdaily.com/loans/fed-interest-rate-small-business

https://www.nerdwallet.com/article/small-business/3-ways-small-business-owners-will-feel-a-fed-rate-increase