The Impact Of Interest Rate Fluctuations On Cash Flow Management For Small Businesses

Do you think that a small change in interest rate can really impact your business? Well, yes it can make a huge impact on your business.

Mohan runs a small manufacturing unit in Hyderabad, In April 2023, he borrowed ₹50 lakh at 9% annual interest to buy new machinery. 

His monthly EMI is ₹52,074.

However, in December, the interest rate increased to 11%. Now, he is paying an EMI of ₹54,959. 

You can see that a 2% increase in interest rate made a monthly difference of ₹2,885 in his EMI and ₹34,620 annually. Such an amount is enough to delay hiring a new technician.

Why Do Interest Rates Influence Business Performance?

A change in interest rate might sound like a small change to you but its impact is huge. It plays an important role in business in:

• Planning future expenses
• Managing working capital
• Payment for loans

Even the slightest change in interest rate can impact a business’s:

• Daily operations
• Inventory purchases
• Salary payouts
• Investment in growth

Real Cash Flow Impact Of Rising Rates

Let’s have a look at the changes in EMI with interest rate rise on ₹25 lakh business loan for 5 years:

Read More – How Local Businesses Are Innovating to Compete in the Digital Age

You can see that a small change of 3% results in almost ₹60,000 more in interest per year. It impacts the budget planned by the company. 

Short-Term Challenges For Small Businesses

1. Higher Loan Repayments

As loan EMIs go up it reduces the cash flow of your business and impacts day-to-day operations.

• Loan EMI ↑ = Cash Flow ↓
• Loan EMI ↓ = Cash Flow ↑

2. Delay In Growth Plans

Due to an increase in interest rates, you might have to postpone buying new equipment, hiring staff, or entering new markets.

Long-Term Challenges For Small Businesses

1. Decrease In Net Profits

The more money you pay as interest, means less profits. Let’s look at an example of profits before and after a change in interest rates:

2. Weakened Vendor Payments

If the cash flow of your business decreases, then you might not be able to make timely payments to the suppliers. It will affect your business reputation.

How Falling Interest Rates Help Your Small Business?

It is very easy for you to understand that when rates fall, your monthly EMI decreases, and now you will be able to save more.

Jigyasa took a business loan of ₹15 lakh in 2022, at 10%. Let’s look at how falling interest rates help her business:

She was able to save ₹984 monthly or ₹11,808 annually. She used this amount to buy new lighting and refrigeration upgrades, improving customer experience.

Strategies To Manage Cash Flow During Rate Fluctuations

1. Switch to Fixed-Rate Loans, which will protect you from rate hikes.

2. Use cash flow forecasting as it will help you in planning expenses.

3. Maintain an emergency buffer of at least 3 months of EMI in cash.

Improving Cash Flow To Handle Interest Burden

You cannot control changing interest rates. But you can make simple changes in your day-to-day operations. 

The following are the beneficial tips to improve your cash flow:

Monitor The Financial Health Of Your Business

If you use basic tools such as Excel, bank alerts, or accounting apps they will help you in monitoring changes.

Final Thoughts

Interest rates will always go up and down. But if your business is well-managed you can stay steady even during such shifts. 

Your business will face both long-term and short-term challenges but with proper monitoring strategies, it will recover soon.

Also Read - How to Choose the Right Bank for Your Small Business Needs

It is essential for the growth of your business that you watch each money movement of your business. Try to reduce your non-essential purchases and you will be able to save more.

FAQs

1. How can I reduce my monthly financial stress?

You can reduce it by tracking expenses, building a reserve, and avoiding non-essential purchases.

2. Can cash flow issues affect my credit score?

Yes, delayed loan repayments due to poor cash flow may impact your score.

3. Is it a good idea to prepay small parts of my loan?

Yes, even small prepayments can lower your interest burden in the long run.

4. Can rising rates affect inventory buying?

Yes, higher EMIs may leave less cash for stocking goods.

Apply for Loans Fast and Hassle-Free

Apply Now

About the Author

LoansJagat Team

We are a team of writers, editors, and proofreaders with 15+ years of experience in the finance field. We are your personal finance gurus! But, we will explain everything in simplified language. Our aim is to make personal and business finance easier for you. While we help you upgrade your financial knowledge, why don't you read some of our blogs?