What Higher Interest Rates Mean for Marketing Your Business (9 ways)

If you would like to know what higher interest rates will do for your business, you have come to the right place.

That’s because we are going to review the ways higher interest rates affect for your business, and how it will affect your growth and marketing.

What Does Higher Interest Rates Mean for Marketing Your Business? Higher interest rates will affect your business in many ways, including;

  1. Difficulty in forecasting
  2. Increases the cost of capital
  3. Makes it more difficult to obtain financing
  4. A decrease in sales revenue
  5. Affects cash flow
  6. Decreases net income
  7. Hampers business growth

Rising interest rates have cascading consequences on the economy that have an effect on virtually every business. 

High-interest rates discourage business and consumer spending, which is tragic for the business environment. People and businesses become more cautious in their spending habits, and it reverberates across the entire economy. 

Dig in as we detail what higher interest rates could mean for your business, your target market and how you develop your growth and marketing plans.

Here are the 9 ways higher interest rates will affect your business and marketing strategy: 

1. Higher interest rates affect business forecasting and planning 

Higher interest rates can impact your business and marketing by making it harder to plan.

This is largely because higher interest rates increase the cost of capital. For example, if your source of capital is based on a variable rate loan, such as a line of credit, this can affect return on advertising planning, staffing, inventory planning, and a lot more.

When the banks charge more for loans, it forces businesses to rethink business plans, let alone aggressive marketing strategies. For one, you’ll need to make adjustments for the rise in interest expense, and this directly affects your net income.

As another example specifically addressing manufacturers, a rise in the cost of capital impacts the purchase of your raw materials, work in progress inventory, finished inventory and ultimately sales and marketing forecasting and planning. This will affect your gross profit, and again, trickles down to net income and forecasting.

If you already have a high level of debt, a raise in interest rates can dramatically dampen your growth plans as extra resources will go towards serving the debt and interest expenses. In this case, especially as the majority of the business world has become accustomed to very cheap capital, a business must redirect resources away from research and development, expansions, and reinvestment into growth to service the rising cost of debt. 

If you are needing outside capital to fund marketing and growth strategies, you will definitely benefit from this tutorial to find other ways to fund your growth:

How Do You Fund a Marketing Campaign? (Solved!)

2. Higher interest rates make it harder to obtain funding for your business

Higher interest rates lead to lowered bank lending. This is largely because commercial lenders raise their minimum requirements to safeguard their position and lower the default risk. 

This means that with an increase in interest rates; 1) You will face more obstacles when securing business funding, and 2) The loans will be more expensive, i.e., the cost of capital increases. 

As noted above, higher rates will also impact your daily business operations. If the rates on your long-term debt are variable, the loans may get expensive. It will take you longer to repay the debt, increasing the cost of financing and lowering your business income. The inability to secure capital may make meeting all your financial obligations challenging. A cash crunch may impact your ability to properly service your customers. 

Here is an excellent tutorial on creative ways to find capital for your business:

How Do You Finance a Marketing Campaign for Business Growth? (7 ways)

3. Higher interest rates make it more expensive to get a business credit card

As a business owner, you can access a variety of benefits by opening a business credit card. Whether you already own an active business credit card or seek to open a new card to finance your marketing campaigns, this financial instrument is a viable way to pay for your marketing campaign expenses.

This may include recurring expenses such as email marketing, pay-per-click (PPC) advertisements, direct mail campaigns, as well as video productions for video campaigns.

Some of the best business credit cards you can use for your marketing campaigns include the various American Express business credit cards and Ink Business Preferred Credit Card. 

We prefer the Ink Business Credit Card by Chase as the points do rack up pretty quick and can be applied to cash back, business hotel stays, airline tickets for business trips and more.

4. Higher interest can result in declining sales revenue

An increase in interest rates can affect your sales in at least two ways; 1) Higher interest rates affect your cost of capital which makes doing business more costly and ultimately impacts your sales, and 2) Just as higher interest rates affect your business, it also affects your customers' available resources to purchase your product or service.

For example, higher interest rates negatively affect consumer spending habits by increasing the cost of credit. Higher interest rates mean people will spend more money repaying their mortgages, personal credit card debt, auto loans and personal loans. 

The increased payments that go towards serving debt results in lower discretionary income to spend on your business’ products and services. Less disposable income forces your customers to cut back on spending, which translates to fewer sales. 

This reduction in top line sales revenue will tighten a business’ free cash flow. Higher interest rates trigger uncertainties that entice people and businesses to prioritize saving extra cash. 

5. Higher interest rates are because of a higher prime rate

Face it, the bank has to make a profit.

When the Federal Reserve’s Board of Governors raise the federal discount rate, this increases the cost of money being loaned to commercial banks from the Feds. 

  • An increase in the Federal discount rate indirectly results in an increased prime interest rate.  
  • The Federal Reserve does not set the prime rate. 
  • The prime rate is set by individual banks, which is why you need to shop around for the best prime rate.

Wedged in between the Federal discount rate and the prime rate is the federal funds rate. The federal funds rate is the rate the banks charge one another for short term loans. The federal funds rate is usually about 1% lower (100 basis points) than the Federal discount rate so that banks are encouraged to borrow from one another rather than going to the Fed for money, which is 1% more expensive than asking a fellow bank.

After all, if you, as the bank owner, are looking to beef up your balance sheet with an extra $5,000,000,000, this means your bank could save $50,000,000 in interest expense simply by shopping around before going to the more expensive Federal Reserve for money.  

Onward.

Many individual banks choose their prime interest rates based on the federal funds rate. This prime interest rate is the interest income earned by the banks when they loan money out to a customer.  

Prime rates form the basis of interest rates on a variety of bank’s products, such as mortgages, credit cards, auto loans, business and personal loans. Rising interest rates force lenders to increase their rates, making business loans more expensive. 

This results in higher loan repayments, which impacts your free cash flow. 

6. Higher interest rates can affect cash flow 

Higher interest rates can be a big negative for small businesses because they often operate with limited cash flow. 

Higher rates mean you have less free cash to put towards growth, and need more of the cash to repay loans. 

The increased payments diminish the free cash available to your business for innovation, R&D, customer acquisition, customer support staff and inventory. A business may be unlikely to cover the cash flow gaps with short-term loans because they’re too expensive, or difficult to qualify for. 

This lower cash flow may affect the ability to pay creditors, triggering a cascade of negative issues. And, suppliers may decline to extend your credit, which could dampen your sales revenue. 

7. Higher interest rates can decrease profit margins

Higher interest rates coincide with an increase in operating costs. 

You’ll probably spend more to purchase and ship raw materials as your supplier will undoubtedly raise their prices. 

These higher interest rates will have you spending more on debt repayment, further eating into your thinning profits. 

Additionally, and as mentioned above, these higher interest rates have a cascading effect that affects your customers’ disposable income affecting your sales revenue and potentially affecting your purchasing power from your vendors. 

Many businesses revert to lowering their prices to entice people to buy their products, further lowering the profit margins. 

It is very important to tighten up your budgeting. For an excellent tutorial, go here:

Why Is Budgeting Important to a Business? (+free template)

8. Higher interest rates can increase commercial property expenses 

If you own a mortgaged property with a variable interest rate, your mortgage costs are likely to increase very quickly. 

Most variable-rate mortgages follow the federal discount rate, the federal funds rate and prime rate and quickly adjust accordingly. 

The higher repayment will impact your cash flow and profitability by increasing your fixed expenses, further affecting your free cash flow, net income and profit margins. 

The same case applies when operating out of rental premises. Your landlord will likely increase the rental prices, which will affect your monthly business expenses. High mortgage costs raise the cost of real estate properties, making it more difficult for small and medium enterprises to own their commercial properties. 

9. Higher interest rates hamper business growth

Higher interest rates decrease consumer spending, which directly impacts business.

High-interest rates also affect the cost of borrowing, making it expensive to finance business operations. 

These factors compound business growth by lowering your sales, decreasing gross profits and reducing free cash flow, while making it more costly to secure business financing. 

While these 9 items sound bleak, all is not lost. When interest rates rise, making the cost of capital more expensive, this literally forces the business environment to be better. When there is less money circulating, this creates better competition and more innovation. And, this forces marketers to be better communicators, focus on creating more value to their target market, and do more with less -- all the things we do and teach at StrategicMarketingPartner.com

References 

  1. https://www.sc.com/sg/save/savings-accounts/jumpstart/stories/fed-interest-rate-hike-what-does-it-mean-to-consumers/
  2. https://www.scheller.gatech.edu/news-events/latest-news/2022/articles/rising-interest-rates-what-it-means-for-the-economy-and-the-consumer.html?utm_medium=email&utm_source=daily-digest&utm_campaign=2022-06-07&utm_content=news
  3. https://www.conference-board.org/topics/geopolitics/rising-prices-and-interest-hikes-a-double-whammy-for-the-american-consumer
  4. https://knowledge.wharton.upenn.edu/article/what-higher-mortgage-rates-mean-for-the-housing-market/
  5. https://americandeposits.com/what-rising-rates-mean-business/

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