What Entrepreneurs Need to Know About the Fed's Rate Rise
Citing strong economic progress, the Federal Reserve’s decision to raise rates for the second time since the financial crisis of 2008 has business owners asking when they’ll see banks tack the increase onto capital costs.
Announcing the rise at a press conference, Fed Chair Janet L. Yellen told reporters, “I would say at this point that fiscal policy is not obviously needed to provide stimulus to help us get back to full employment.”
According to the Fed, the increase of the federal funds rate might not be the last in the next twelve months. In a statement, the Fed said they expect economic conditions “will evolve in a manner that will warrant only gradual increases in the federal funds rate,” further supporting market expectations that rates will likely continue to rise over the next year.
Although only time will tell when the cost of capital will be bumped by lenders, it’s important for business owners to remain alert if their access to capital is changing -- especially if the Fed predicts a brightening economic outlook. As the economy improves, interest rates are only going to increase.
Securing finance is traditionally easy to get when you don’t need it and when you need it, it’s hard to get, or it will likely cost you more. Low-risk businesses are usually is a better position to access capital at a lower rate. Constant cashflow vigilance is key here. By lining up capital flows in times where cash flow is good, you’ll save yourself from slipping into dire cash flow straits.
While any further interest rate increases will be done so gradually, entrepreneurs may be affected when trying to finance their businesses or even expand. This is an opportunity for banks to step up to accelerate small business lending. And in the future, we’ll see this trend strengthen through the financial web, a network of organizations sharing financial data.
When this data flows between accounting and banking systems, this is when we start to see productivity and growth unlocked in the small business market, which is traditionally a high-risk, low-yielding sector for financial institutions to service.
Worldwide, many financial institutions share this vision, with banks and large enterprises connecting directly to technology platforms in order to offer financial services to small businesses in a way that is both cost effective and scalable. Through this partnership, banks are starting to automatically flag business owners when cash flow looks tight and offer financing to tide them over.
With a full set of historical audited numbers at the fingertips of bankers, and an accounting professional there to review the numbers each day, lending to a small business becomes less of a risk.
But until the financial web becomes more readily available, how do you know when it’s the right time to take money and at what price? The short answer is to consult your advisor. They’ll be able to give you the best advice as to when you should take money or not. A good rule to follow is the best opportunity to access capital is when you’re confident you’ll be able to achieve a return above costs of debt. If there’s less confidence in that investment return, more extensive financial modeling may be needed in order to determine risk versus reward. The fewer risks a business owner takes, the better.
By keeping an eye on your cash flow and discussing lending with your advisor, even when business is good, you’ll be able to ease those rate rise worries.