{"id":9085,"date":"2023-10-03T03:52:35","date_gmt":"2023-10-03T03:52:35","guid":{"rendered":"https:\/\/ownrblog-preprod.go-vip.net\/?p=9085"},"modified":"2023-12-07T13:04:23","modified_gmt":"2023-12-07T13:04:23","slug":"what-changing-interest-rates-mean-for-small-business-owners","status":"publish","type":"post","link":"https:\/\/www.ownr.co\/blog\/what-changing-interest-rates-mean-for-small-business-owners\/","title":{"rendered":"What Changing Interest Rates Mean for Small Business Owners"},"content":{"rendered":"

The COVID-19 pandemic sparked a lot of economic changes.\u00a0<\/span><\/p>\n

At the outset of the pandemic, Canada\u2019s federal government injected significant money into the economy to support people who lost their jobs or had to temporarily close their businesses. Provinces and municipalities also followed suit with their own targeted programs.<\/span><\/p>\n

Now, the country is looking to recover, but faces <\/span>historic levels of inflation<\/span><\/a>. To combat this, the Bank of Canada is raising interest rates.\u00a0<\/span><\/p>\n

While raising rates may be necessary to curb inflation, it can also cause challenges and issues for business owners. Here\u2019s what you need to know.<\/span><\/p>\n

Why are interest rates increasing?<\/span><\/h2>\n

When the government injected cash into the economy during the pandemic in the form of corporate supports, community aids, and direct payments, it increased the money supply. The Bank of Canada also decreased interest rates to around zero per cent, which incentivized people to take on more debt and increase their spending.\u00a0<\/span><\/p>\n

Both of these actions were arguably necessary to help Canadians weather the pandemic. However, they resulted in increased inflation as easy credit clashed with disrupted supply chains.\u00a0 People had a lot of money to spend, with limited places to actually spend it.<\/span><\/p>\n

The government and Bank of Canada have a couple tools to get inflation back under control: the government can reduce its spending,\u00a0 (particularly on direct cash programs) or the BoC can adjust its benchmark interest rate.\u00a0\u00a0<\/span><\/p>\n

The <\/span>Bank of Canada website<\/span><\/a> says this about the connection between interest rates and spending:\u00a0<\/span><\/p>\n

Higher commercial interest rates mean people and businesses pay higher interest on loans and mortgages. This discourages them from borrowing and spending and puts the brakes on the economy and inflation.<\/i><\/b><\/p>\n

In short, the Bank of Canada hopes that raising interest rates will make people think twice before spending. This will lower demand and, in turn, lower inflation driven by excess demand.<\/span><\/p>\n

How interest rate hikes affect business owners<\/span><\/h2>\n

Entrepreneurs face a dual challenge when interest rates go up: not only is their business potentially affected, but they are potentially affected as individuals.\u00a0<\/span><\/p>\n

How rising interest rates affects business<\/span><\/h3>\n

Debt becoming more expensive as interest rates rise can lead to two negative outcomes for entrepreneurs:\u00a0<\/span><\/p>\n

Growth becomes more difficult<\/b>: A lot of growth is fueled by debt, such as taking on a loan to buy new machinery or acquire another business. When interest rates are higher, it\u2019s more expensive to service that debt, meaning that investing in growth may not look so attractive when you factor in costs of capital.\u00a0<\/span><\/p>\n

The resulting change is that entrepreneurs looking to grow may not be able to afford the debt to do it. This isn\u2019t necessarily a bad thing, since there are other options such as revenue or equity-fueled growth, but it removes one commonly used pathway.\u00a0<\/span><\/p>\n

High interest rates could lead to recessionary pressure<\/b>: If interest rates slow down spending enough, the country could go into a recession. While recessions are by definition short-lived, they can be incredibly painful.<\/span><\/p>\n

From a business perspective, recessions can mean less revenue as people tighten their spending because they can\u2019t use debt to buy things. Further, people with existing debts will likely need to severely lower their spending to accommodate higher repayment costs caused by interest rate swings.\u00a0<\/span><\/p>\n

This means your business could be in the dual situation of having both lower revenue and limited access to debt.\u00a0<\/span><\/p>\n

How rising interest rates affect entrepreneurs as private citizens<\/span><\/h3>\n

Higher interest rates make items purchased with debt more expensive. This includes:\u00a0<\/span><\/p>\n