Beat the bank: making sense of high interest rates

With the global economy taking a turn for the worse, here's how to manage your finances when borrowing costs are on the rise.
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The following was first published in Thrive, a new limited email series by Courier, designed to help small businesses make some sense of the current economic climate. Read more here.

Central bank meetings come and go – eight times a year, in fact (in the US, anyway). And, for most of the past decade, very little has happened that small businesses have needed to take notice of, with interest rates being kept at (or close to) historic lows since the financial crisis of 2008 in an effort to spur economic growth.

But, if there's one time when you should pay closer attention to the news cycle, it's probably right now. As central banks worldwide attempt to tame inflation, interest rates have risen – and a lot of decision-makers reckon they'll rise further (and stay elevated) for the next 12 to 18 months. And higher rates, of course, mean higher borrowing costs for both businesses and people. 

So, what does this mean for you, your debt repayments and your cash flow? Here are some things to consider.

• Check if any existing debts or credit facilities will be affected by rate rises (like loans with variable rates) and work out how this will affect your outgoings. Remember, it's sometimes possible to negotiate your T&Cs, so get in touch with your bank or loan provider if you're unsure. If you're in a position to pay off any debt early, you might want to consider this to avoid higher interest rates over the remainder of your loan. 

• Get creative with funding. If cash flow's tight, look into things like invoice financing or, if you need immediate additional funds, a business line of credit is a good option. But remember, without fixed rates, any increases to base interest rates will raise these repayments, too. 

• This is an obvious one, but keep an eye on your outgoings, re-evaluate your budget and look for savings where you can. See below for more ways to cut costs.

• Lastly, watch your income. With rates rising, consumer spending could dip and, as a result, so might your sales – creating additional pressure on top of rising material and delivery costs (ie, inflation) and borrowing costs.

CONTEXT. Inflation in the US currently stands at a 40-year high. And, despite recent rate hikes – a tactic widely used by policymakers to reduce inflationary pressures – there's likely a bunch more hikes still to come. Recent chatter suggests that interest rates (AKA the Federal Funds Rate) could rise to and stay above 4% for at least the whole of 2023. FYI, rates are currently set at the 3.75% to 4% range after consecutive 0.75 percentage-point increases in the past four meetings. This might not sound like a big deal (especially for those who don't follow this news regularly), but moves like this don't happen very often – in fact, before this year there hadn’t been a 0.75pp increase since 1994!

A version of this article was published in Courier's Thrive newsletter.

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