What Does the Latest Interest Rate Hike Mean for My Business?
As anticipated, the Federal Reserve raised interest rates a quarter point at their May meeting. The tenth straight rate hike, this is the first time since 2007 that the federal fund rate is above 5%. Acknowledging economic headwinds remain, the Fed hinted in their remarks that they may consider pausing hikes as they monitor resiliency in the economy. The labor market continues to show signs of strength, with the Labor Department reporting employers added 253,000 jobs in April, up from a few months of slower growth. Between looming debt ceiling negotiations in Washington D.C., regional banking instability, and labor market issues, inflation is only one of the economic concerns top of mind for business owners. The rise in interest rates will have ripple effects that will impact both small businesses and consumers.
Challenges for Business Owners
When the Fed raises interest rates, one of the biggest challenges for small and medium-sized businesses is the possibility of credit tightening. With the regional banking sector experiencing continued strain, Fed Chair Jerome Powell acknowledged credit conditions are tightening. While the Fed assesses issues with regional lenders, raising the federal funds rate continues to make it more expensive for banks to borrow money and, in turn, the higher interest rates make it more expensive for businesses to borrow and operate. For business owners with loans or credit lines with variable interest rates, monthly payments may go up as a result of interest rate hikes. This can negatively impact cash flow reserves and make it challenging to reinvest in the business.
To prepare for the impact of higher interest rates, there are a few things small business owners can do. Business owners can review current loans and credit lines and, for those with variable interest rates, refinance with lenders to lock in a fixed rate. A fixed rate can provide stability in monthly payments and protect from further rate hikes. Business owners should also keep a close watch on cash flow, as higher interest rates can have a negative impact on cash flow. It’s important to be mindful of expenses and revenue, especially as consumers respond to higher interest rates with more cautious spending.
Opportunities for Business Owners
The recent interest rate hike from the Fed has business owners feeling uncertain about the economy. In fact, BizBuySell’s most recent quarterly Insight Report finds that 60% of business owners share that interest rates are negatively impacting business. For some businesses, however, higher interest rates can present opportunities. Higher interest rates lead to higher yields on savings and other investment products. So, for business owners with cash reserves or investments that earn interest, the interest rate hike may lead to higher returns. Additionally, higher interest rates can strengthen the value of the US dollar, which can make imported goods cheaper for American businesses.
Business acquisition values remain elevated, despite the pressure of increasing interest rates. Average earnings multiples have come down from the 2021/2022 highs, but remain appealing to business owners.
The current economic landscape is contributing to business owners’ exit planning, offering opportunities in the business-for-sale marketplace. 30% of business owners surveyed for the Insight Report share that they are speeding up their plans to exit their business. This is welcome news for the buyers surveyed. With 45% of entrepreneurs reporting now is a good time to buy a business, and 34% seeing a good variety of businesses to choose from. Between business owners retiring and the opportunity to capitalize on emerging markets or opportunities, the current economic climate is not a deterrent for many business owners looking to sell their business.
As small business owners and entrepreneurs counter the challenges from the Federal Reserve’s efforts to tame inflation, there are many opportunities on the horizon. For those looking to list and sell a business, the business-for-sale marketplace is showing signs of strength. In fact, during the first quarter of 2023, businesses listed on BizBuySell posted higher financials, indicating a strong interest from buyers in companies that are doing well. With businesses and customers alike adapting to the current economic climate, the most recent rate hike is creating new possibilities.