Effects of rising interest rates on businesses 

0

Rising interest rates typically make debts more expensive (to acquire and service) while creating higher income for savers (in the form of increased rent income and loan interest income). The rise in interest rates, in general, affects businesses in diverse ways, including a fall in revenue; firms with overdraft obligations will have higher costs since they must now pay more interest to service the debt. It is important to understand the likelihood of what will happen to your business finances in dealing with the potential increase in interest rates. The following are some of the effects of high-interest rates:

High cost of borrowing money

It becomes more expensive to borrow money when interest rates increase, especially when it is considered as one of the three major factors that determine the monthly repayment of loans. Others include the amount borrowed, and the time to repay the debt. There will be a decrease in business activity since it will be expensive to borrow money as consumer spending will be affected by the high-interest rate. I will advise businesses and individuals to consider all costs when shopping for a loan, line of credit, or credit card. It is vital to consider the loan amount, the interest rate, the loan team, and the loan fees. For instance, if you want to borrow GH¢300,000 for 30 years, the payment can increase significantly with the rising interest rates. At 2 percent interest, your monthly payment is GH¢1,108.86. Moreover, when the rates get to 4 percent, the payment increases to GH¢1,432.25 per month, which is almost 30 percent higher.

Cost of goods

It is important to note that rising interest rates affect more than just loans or credit cards, especially when they also have a ripple-effect throughout the Ghanaian economy. The cost of goods (especially foodstuffs in the market) has increased; and suppliers, on the other hand, have no choice but to increase their prices to offset the increased cost of doing business. Personally, I have noticed that my monthly cash flow is restricted compared to the previous months as other costs go up. SME business owners need to develop and design new ways to streamline their operations and strategies to make financial savings each month.

Customer spending and saving

The rising interest rates trigger changing customer spending habits which affects their cash flow. Furthermore, consumer-driven businesses often see a reduction in sales which affects their cash flow eventually. Normally, consumers increase their savings during this period since they will receive higher rates of return as they invest their savings. The current level of rates and expectations regarding future rate trends are factors in deciding which way the consumer will lean. Banks, on the other hand, will increase the rates they pay on a savings account to attract new customers and retain deposits from existing customers.

Business cash flow

SMEs tend to operate with limited cash flow, so during periods of high-interest rates, additional cash is needed to repay loans which may be difficult to get. Furthermore, getting short-term loans to cover cash flow gaps may be difficult and expensive. Business owners may have to delay paying their receivables or put off investment and expansion plans, which can further slow the business growth rate. Businesses have difficulties in building up their cash reservices in the current inflationary environment.

Lower consumer income

High-interest rates typically affect consumer spending habits because they have to pay more to keep their loans current, resulting in less disposable income to spend on products and services. For example, businesses that deal in luxurious products or services may be hit harder by a rise in interest rates than a company providing basic staples because luxury items are usually the first thing consumers eliminate when they have less-disposable income.

The writer is a Lecturer, University of Professional Studies Accra

[email protected]

Leave a Reply