How do interest rates affect a new business?

Asked on by imara94

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pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

Interest rates affect new businesses because almost all new businesses will need to borrow money.  In some cases, interest rates may also affect new businesses if buyers will need to borrow money in order to buy the products the new business makes.

Interest rates, of course, determine how much it will cost to borrow money.  A higher interest rate means that it will cost more to borrow.  When it costs more to borrow, it is more difficult for a new business to get started because it has to spend more to borrow the money it needs.  Customers may also not buy as much if they have to pay more to borrow.

So, the higher the interest rate, the harder for a new business to get started.

lalithareddy's profile pic

lalithareddy | High School Teacher | (Level 1) Valedictorian

Posted on

. At the most basic level, the goal of all businesses is to make profit. Therefore, venture a business makes must be thoroughly analyzed for its ultimate prospects at bringing in profit, and how those prospects compare to other possible sources of revenue. Since saving capital at current interest rates is a possible source of revenue, higher interest rates tend to make new ventures less attractive. For instance, if a cost benefit analysis shows that a new program within a company is likely to yield a profit of 4% per year for all money put into the program, but the prevailing interest rates are 6%, the company is better off putting their money in the bank. In this way, interest rates dictate what a business will consider a strong return on investment.

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