What does the Fed interest rate hike mean for your business?

Real estate sellers have benefited from a very strong market over the past 2 years. Many of us are wondering where prices are headed next. As of today, the market is still very hot and investors are working to get cash put into the right deal. If you are buying or selling real estate, you should keep an eye on the current interest rate trends.

Last month the Federal Reserve increased the federal funds rate by 0.25 percentage points and they anticipate more interest rate hikes throughout 2022. But what does this mean for you and your business?

An increase in the federal funds rate means that it is more expensive for banks to borrow money and also more expensive for them to lend to consumers. This increased cost is then passed along to consumers, meaning it is more expensive for individuals and businesses to take on debt. The impact to you and your business is likely dependent on the industry you exist in, your current borrowing, and any plans for future borrowing. For example, if you are in real estate investment, you will be impacted by rising mortgage rates and the pressure that’ll apply to the overall housing market (depending on how you finance your deals). In general, businesses can expect the increase in the federal funds rate to have the following potential impacts on business:

• Increases in the price of business loans and more lending scrutiny. The increase will be more drastic if you have a loan with a variable interest rate.

• Credit card debt will become more expensive. If you rely on credit cards to help manage your expenses and cash flow, expect credit card interest rates to reflect increases in the federal funds rate.

• Business growth could stall as a consequence of increased interest rates. As increases make it more costly for businesses to borrow money, the same can be said for consumers. Depending on your industry, you might be more impacted by decreases in consumer spending.

The timing in which your business might feel the effects of a rate increase depend on a variety of factors, including if you have fixed or variable rate debt, how much debt you have, your industry, and so on. It could also be the case that your business is years out from seeing any kind of major effect, if at all.

In last week’s blog, we discussed the roller coaster of the past two years - through world events, personal changes, and a changing financial landscape. An increase in interest rates is another example of the power a solid financial plan can provide to you. A good financial plan can and should be reviewed/updated as needed but the core fundamentals will remain the same and help you to feel secure.