You have most likely heard the term "low-interest-rate environment." If you haven’t already, take a look at your savings account. You get almost no interest on your money anymore, and in many cases, you have to pay your bank to deposit it.

Since the 2008 financial crisis, interest rates have been extremely low. But that is beginning to change as the Federal Reserve seeks to combat rising inflation. Rising interest rates are a key monetary policy tool for combating inflation.

What Does It Mean for SMEs?

Rising interest rates mean mostly two things: you can earn more interest on your cash balance again. However, you shouldn’t get your hopes up. Given the current rate of inflation, real interest rates – meaning your interest after inflation – will still remain negative even if rates rise.

Secondly, you will have to pay higher rates on your loans. Higher financing costs in financial markets mean banks will also increase their loan rates. As a result, borrowing costs for businesses will rise.

Rates Won’t Skyrocket

The effect of rising rates will likely be negative for most SMEs as well. Small businesses typically don’t have much cash lying around, so the impact of higher rates on that cash will be insignificant.

On the other hand, loans are still a prime source of financing for most SMEs, meaning the higher cost will hit SMEs.

With all that said, rates are still historically low. The recent rise has been significant, but it has not changed anything in the low interest-rate environment. It is also unlikely that central banks will overdo it, as increased government and private debt levels limit their ability to
raise rates.

Long story short: SMEs don’t need to sweat rising rates. If you need financing, it could be clever to get a loan now, considering that rates will likely rise more. Otherwise, don’t worry about it; rates won’t skyrocket. The much bigger concern is inflation.

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