Wooden block with white percentage sign indicating interest rates on wooden table with blue background, economy

Interest Rates: 6 Economic Indicators Small Businesses NEED to Watch, Part 4

Welcome back to our ongoing series on economic indicators that you as a small business owner NEED to be watching. 

In the previous installments, we’ve explored how factors like GDP growth and unemployment rates can impact your business. 

Now, we’re talking about interest rates – a key metric that can make or break your financial strategy. 

Because let’s face it: just like taxes and Mondays, interest rates are an unavoidable reality of life. 

They will fluctuate, and there’s no magic wand to make them disappear – so let’s learn how to set ourselves up for success to best handle them. 


4. Interest Rates

In short, interest rates are determined by three forces: 

  • The Federal Reserve: short-term and variable interest rates (also called The Fed)
  • Investor demand for U.S. Treasury notes and bonds: long-term and fixed interest rates
  • The banking industry: can change interest rates depending on business loan or mortgage needs 

These forces impact everything from loans and credit lines to savings accounts. 

(For a more detailed breakdown of what each of those three forces entail, check out this article.) 

Here’s a quick breakdown of why interest rates should be on your mind:

  • Borrowing Costs: When rates are low, borrowing costs decrease, making loans and credit lines more affordable for business expansion or operations. Conversely, high rates can increase borrowing costs, creating a hefty dent in your profitability and cash flow. 
  • Investment Decisions: Interest can influence decisions on whether to invest in new projects or equipment. With low rates, the allure of investing in new projects or upgrading equipment can be tempting. But when rates soar, it may be time to hit the brakes on new projects and instead focus on debt repayment. 
  • Savings Impact: For small businesses with surplus cash (a great problem to have!), interest rates will determine how much bang you get for your buck in savings accounts or other interest-bearing investments. Because, in those times when every single penny counts, you’ll be glad you took advantage of the interest on that extra cash. 


Strategies for Adapting to Interest Rates Changes: 

  • Debt Management: Monitor your business’s debt obligations and consider refinancing or consolidating loans during periods of rock-bottom rates. By minimizing borrowing costs, you can free up cash for the more essential business needs. 
  • Flexible Financial Planning: Develop a financial plan that can adapt to changing rates, ensuring your business remains resilient in various economic conditions. Again, it’s all about that emergency fund! 
  • Stay Informed: Knowledge is power, especially in the realm of interest rates. Watch for central bank announcements and economic forecasts related to changing rates. 


Whether we like it or not, interest wields unparalleled influence over our financial fate. 

Whether the rates rising or falling, one thing’s for sure: you can’t afford to ignore them.

Interest may seem like an abstract concept, but its ripple effects can be felt far and wide in the business world (and in your wallet). 

By arming yourself with knowledge, staying flexible in your financial planning, and keeping a finger on the pulse of such economic indicators, you can position your small business for success, no matter what the future holds. 

So, take heed of these insights, stay proactive, and get ready for the next chapter in our ongoing journey through the economic indicators that matter most to small business owners: the Consumer Confidence Index. 


Author, Virtual CFO, and Finance Coach
Your First CFO: The Accounting Cure for Small Business Owners” on AMAZON