The central banks change the interest rates to control the money supply in the economy further controlling inflation. It is said that inflation is good for the economy but hyper inflation is not good for the economy. Inflation by 2-3% is good for the economy as a whole, thus the government with the help of central bank controls inflation through many ways in which interest rates play a major role. But the question of the hour is how small business can handle rising interest rates? There are some which believe that hiked interest rates are good for the small business economy while there are others as well. Does the trickle down effect really comes to any action?
How Interest Rates Work?
When there is inflation or deflation in the economy, the central government on the behalf of the government is responsible for controlling it. Excess of both is dangerous for the economy. When there is excess money supply in the economy, the central bank increases the interest rate leading to cut the excess flow of money in the economy. The interest rates are lowered to increase the money supply in the economy because deflationary situation is present in the economy which is surely bad for the economy.
How Is It Good For The Small Business Economy?
With increasing interest rates the competition in the small scale business economy is reducing but it is becoming more competitive, as only the best are sanctioned loans. The banks now a day grant loans after doing a lot of formalities and checking the proper paperwork. If the bank feels one might not be able to repay the loan with the current interest rate they do not grant loans.
Better For The Banks To Lend Loans
With higher interest rates, only those people are able to survive the paperwork with strong plan of action which truly might show some results. So it is good for the banks to lend the money to such people with a higher percentage of paying off their loans.
Evaluate Your Debt Level
If you have still not evaluated your debt level, this is the time to do it. Evaluate your business and see how it is actually doing – the amount of loan which is to be paid off, other creditors, the debt equity ratio plays a very important role. This will also give you a chance to plan the future of your business and see whether you might need some additional funding.
How Is It Bad For The Small Business Economy?
Everything has advantages and disadvantages, similarly increasing interest rates is not good for everybody. Increasing interest rates means higher cost of setting up a new business, thus it affects the new business houses not the existing ones. In countries where unemployment is a major problem, new business is solution to it and by increasing the interest rates that is also affected. High interest rates lead to cutting down the profitability and the scope for expansion which further leads to unemployment. When the cash flow is disturbed the first thing the owner of any business do is lay off the laborers. Thus, it is a big setback for the economy as a whole and will prompt more people to work in the informal sector.
Major affect is on the short term loans which are taken to cover short cash gaps, thus affecting in the expansion of the business. Due to increasing rates one might have to postpone the additional funding which not only affects one business but the economy as a whole. It leads to widening in the gap between the rich and the poor and adds to unemployment. Thus, increasing rate will not do entirely good for the small scale business economy.
The Bottom Line
Any decision taken by the bank affects the economy as a whole. Right decisions with the right planning is very important for any business to grow. Interest rates affect the business but planning and the plan of action is also very important. A good leader and business man knows when to turn the problems into opportunities. They know how to always grow and outgrow the odds. One should always compare, observe and work on all the possible options before making any decision.