No matter where we’ve felt it — at the pump, at the grocery store, or in the various costs of doing business — inflation levels are impacting us all, and so are interest rates. Over the last several months the Federal Reserve has aggressively raised interest rates, and they seem intent on continuing to do so until inflation is under control. It’s possible these rising rates may throw the U.S. economy into a recession. Even so, there’s no need for anyone to panic — especially business owners. The more we understand about inflation and interest rates, the better we can navigate through and out of these tough economic conditions.
What Got Us Here
A short, recent history of rates may help to explain how we got to this point. During the 2008-2009 financial crisis, which is sometimes referred to as the “Great Recession,” the Fed lowered interest rates to almost zero to promote spending and borrowing. The federal funds rate dropped from 5.25% in September 2007 to a range of 0-0.25% in December 2008, with much of the reduction occurring in the first and last quarters of 2008. The rates increased only nominally through 2016, when they began to creep up, peaking at 3% in late 2019.
In early 2020, rates were lowered again due to the pandemic and its effect on the U.S. economy. Recently, though, pandemic-induced supply chain issues, government stimulus programs, and renewed demand for products and services led the Fed to realize that inflation was not “transitory” but real. They recognized that more extreme measures were needed to combat inflation and started a series of rate increases in March 2022 that they are expected to continue through 2023.
As a result, rates have increased across the board: Consumer loans, mortgage loans, and commercial loan rates all reflect the change. For example, at the time of this writing, the prime rate is 6.25% (the highest it’s been since January 2008), and 30-year mortgages are just a few tenths of a percentage away from 8%.
To make inflationary pressures worse, in February 2022 Russia invaded Ukraine, setting off a series of economic sanctions with global repercussions. The worst impact was an increase in oil prices, which was ultimately reflected in $4- to $7-per-gallon gasoline prices at the pump.
The Effects of Rising Interest Rates
The impact isn’t just hurting potential homeowners or automobile owners. Businesses are affected by rising interest rates in a variety of ways.
First of all, banks are charging higher borrowing rates on existing loans and lines of credit, most of which are variable and adjust with the prime rate. Even minimum interest-only payments on these loans are straining monthly budgets.
Owners needing financing to make investments in plants and equipment might be hesitant to borrow money at today’s rates, which, in turn, will delay physical expansion or growth in production.
Rates aren’t just squeezing the payables side; they’re also impacting receivables. Collections on outstanding accounts may slow down because customers want to hang on to their cash longer to manage their own liquidity concerns. If you sell something that requires them to seek financing, they may also have the same reservations about borrowing.
The worst effect may be that recession I mentioned earlier. Rising rates and inflation may plunge us into that deep, dark, economic hole, necessitating layoffs and sparking a significant slowdown in sales.
All is Not Lost
So what can a business owner do about rising rates? My first suggestion is to consult the experts in your professional network, including your banker, your accountant, and your CFO. If you don’t have a CFO on your team, consider the services of a fractional CFO. As your fractional CFO, I can fill the role of a full-time Chief Financial Officer on a part-time, temporary, and affordable basis.
I also recommend that you review business and strategic plans, especially your rolling 12-month-forward budget, and make adjustments accordingly. Again if you haven’t gotten around to formulating that business plan and budget, maybe a call to a fractional CFO would be in order.
Lastly, during times like these it’s important that you carefully manage your cash. Avoid unnecessary expenditures while looking hard at your profit and loss statement with an eye toward cutting expenditures. Also, take another look at inventory levels. Consider price reductions for stagnant or slow moving items as you envision your inventory on the shelves.
These times can be trying, but they don’t have to devastate the business you’ve worked so hard to build. Remember, we’re all in this together, and I would be honored to pitch in as your fractional CFO to help you manage and perhaps even thrive through whatever the next months (or years) may bring. Give me a call at 256-318-8242 and let’s talk.