The Federal Rate Rise: What you Need to Know

The Federal Reserve Bank decided to raise rates for a second time citing strong economic progress since the financial crisis of 2008. This has gotten business owners asking banks when they will see them tack this increase into capital costs.

Federal chair Janet L Yellen, who announced the rise at a press conference, told reporters that fiscal policy is obviously not needed to provide stimulus to help get back to full employment. According to the feds, this increase might not be the last experienced in the next twelve months. They also stated that expected economic conditions were bound to evolve in a manner that will warrant only gradual increases in the federal funds rate. This was in support of the statement that market rates will only continue to increase in the next year.

Despite the fact that it is unknown when the cost of capital will be bumped by lenders, it is important that small business owners remain alert to any changes in access to capital. As the economy improves, interests are bound to increase as well.

As fate may have it, securing finance is easiest when you do not need it and nearly impossible, hard to get, and really expensive when you need it. Low-risk businesses are often in a better position to access capital at a lower rate. Constant cash flow is the key thing in this case. When businesses line up capital and when cash flow is good, they are saved the headache of slipping into dire cash flow straits.

Any other further interest rates will be done at a gradual rate that the only time entrepreneurs will be affected is when they are trying to expand their business or when financing their businesses. This situation allows banks to accelerate small business lending. This trend is bound to strengthen in the future through the financial web a network of organizations sharing financial data.

The flow of data between accounting and banking systems is when businesses will begin seeing the productivity and growth in the markets, which traditionally is high risk and low yielding for financial institutes to manage to service.

Internationally, many financial institutions share this vision where banks and large enterprises directly connect to technology platforms to offer financial services to small businesses in a cost-effective and scalable way. This way banks will be able to automatically flag business owners when cash flow is tight and offer them financing solutions.

With audited information at the bankers’ fingertips, with accountants there to review the numbers, lending to small businesses will eventually become less of a risk.

Since the financial web is not readily available at the moment, how will a business know it’s the right time to take money, and at what price? Ideally, consulting professional advisors is the best option as to when to take the money or not. The best opportunity however when it comes to accessing capital is when one is confident they will be able to achieve a return that is above the cost of debt. If one is not entirely confident then a model to determine risk versus reward should be used to determine the viability of taking the money. Though the fewer risks the business takes, the better.

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