The Impact of Rising Rates and Inflation on Your Business
Navigating economic challenges and opportunities in a changing financial landscape
Reading Time
8 min
Common Trust Financial Tips
Published: May 30, 2025
Federal interest rate changes can significantly affect business operations and planning
As a business owner, thinking about the economy is part of the job. Inflation, recession, job growth, wages, etc., all factor into how you do business. Lately, the rise in federal interest rates is a hot topic and you may be wondering how this will affect your business.
The Fed has been increasing rates on a regular basis in 2025 to cool off inflation and slow down the economy to a more manageable level. When federal interest rates are high, it becomes more expensive to do things like borrow money or carry debit. In turn, this can decrease consumer demand, bringing prices back in check and alleviating strain on supply chains.
Key Insight: Interest rate changes typically take 12-18 months to fully impact the economy, making proactive planning essential for businesses.
Increased Cost of Borrowing
For the last few years, interest rates have been at near all-time lows, mostly to help soften the economic impact of the pandemic. Just look at the housing market and the demand for cars—lower interest rates spur purchase and consumption. It also drives inflation, which is why the Fed wants to pump the brakes.
Current Rate Environment
- • Prime Rate: 8.50% (up from 3.25% in 2021)
- • Average business loan rate: 7.25-9.75%
- • Commercial mortgage rates: 6.5-8.5%
Impact on Businesses
- • Higher payments on variable-rate loans
- • Tighter lending standards
- • Reduced capital investment
Increased Cost of Operation
It's no secret that rising interest rates affect more than just loans or credit cards, cascading through the economy in the form of increased prices for goods and services.
Costs for raw materials and supplies are climbing, and lead times are getting longer. Wages and healthcare costs are also on the rise, and offering competitive wages and benefits is crucial to retaining your employees.
Cash Management Challenges
Rising interest rates on your loans can diminish your cashflow, as your costs go up and the dollar amount on loan payments increases. This can lead to less day-to-day cash stability and reduce the ability to invest in long term growth.
Cash Flow Management Tips
- • Renegotiate payment terms with suppliers
- • Implement stricter accounts receivable policies
- • Consider invoice factoring for immediate cash
- • Review inventory levels to free up working capital
Changes in Consumer Behavior
Interest rates affect everyone eventually. This includes your customers, who are likely to spend less when interest rates are higher and their cost of credit and borrowing goes up.
Businesses based on financed products, such as equipment, real estate, or vehicles, may find their customers hitting pause on purchasing. Your customers could be having the same challenges obtaining credit as lending standards tighten.
The Upside of Rising Rates
While rising rates present challenges, they also create opportunities:
- • Higher yields on business savings and CDs
- • Potential to refinance when rates eventually decline
- • Opportunity to streamline operations and improve efficiency
What Can You Do?
Smart businesses owners know they need a financial institution they can depend on and trust. Banking is a vital part of any business, from a one-person operation to a multimillion-dollar medical group.
Immediate Actions
- Review all variable-rate loans
- Analyze cash flow projections
- Reassess pricing strategies
Long-Term Strategies
- Build stronger banking relationships
- Diversify funding sources
- Develop contingency plans
Need Help Navigating Rising Rates?
Our business banking specialists can help you develop strategies to protect your business and identify opportunities in the current economic climate.
