Economy watchers have been waiting all year for signs that momentum in the U.S. economy would necessitate a shift in the monetary policy that has kept interest rates low for several years. That sign came recently when Federal Reserve Board Chairwoman Janet Yellen sent her strongest signal yet that the Fed could start to raise interest rates before the end of the year. This initial nod that business borrowing could get more expensive should prompt businesses to take action now to prepare for more expensive financing costs.
Interest rates in the United States have been held at between zero and 0.25 percent since 2008. This low-rate monetary policy, which was a response to the recession, has been a major component of business growth as companies took advantage of cheap capital to invest and expand.
The news of a change in this policy and a potential rate increase this year came in Yellen’s regular monetary policy report. Yellen stated in the report that “prospects are favorable for further improvement in the US labor market and the economy more broadly,” according to Reuters. The strength in the economy creates concerns about rising inflation, which can stifle growth. An increase in rates would be intended to counter these inflationary forces.
The challenge for Yellen and the Fed is to know how quickly and firmly to apply the brakes to the economy without negatively impacting growth. Yellen statements suggest the Fed is ready to act.
“If we wait longer, it certainly could mean that when we begin to raise rates we might have to do so more rapidly,” Yellen said. “An advantage to beginning a little bit earlier is that we might have a more gradual path of rate increases.”
For businesses, this signal means that borrowing could get more expensive before the end of 2015. There are several steps a business can take to help prepare for higher borrowing costs.
- Establish a relationship with a lender now to lock in better rates. This can often mean exploring non-bank commercial lenders who understand small businesses and will work to establish a flexible financing plan that matches the businesses unique needs.
- Advance important projects. It is time to move forward with investments in new equipment or other capital projects that will help a business grow. Investing in projects now, while money is cheaper, will improve the return on investment and allow a business to take advantage of the added growth potential sooner.
The recent statements from the Fed make it clear that interest rates will soon be increasing. While it is hard to know exactly when and how much these increases will be, what is clear is that planning now can help a business be prepared. Knowing the options available and taking action can help a company continue its growth, even if borrowing becomes more expensive.