If you have ever purchased a car, truck, home, or other big-ticket item, you probably paid close attention to the interest rate before signing on the dotted line. The same goes for credit cards, which have varying interest rates depending on the issuer. The lower the interest rate, the less you will pay to borrow money. If you own a small business, it is important to understand how interest rates work, and how they might impact your company’s financial health. This Balboa Capital blog post has the information you need to know.

Interest rate overview.

An interest rate is simple to understand. It is the percent of principal that a lender charges to borrow money. Let’s say you need a short-term business loan of $150,000 to expand your company. After submitting a loan application, your lender will consider your credit score, cash flow, time in business, and borrowing history, among other factors, to determine your creditworthiness. If, after this thorough review process, your lender approves you for a $150,000 loan with a 9% fixed interest rate, you will repay the $150,000 plus 9% interest on each payment, and any fees, if indicated.

Interest rates and borrowing.

Banks, credit unions, and online lenders are all vying for your business, so the interest rates are very competitive. However, you will be charged a higher interest rate, or have your business loan rejected altogether, if you are considered a risky borrower. Because of this, you should take a look at your credit score prior to applying for business financing. If you see any discrepancies or errors, try to have them removed immediately.

Effects of high interest rates.

Inflation, stock market fluctuations, the U.S. Federal Reserve, and demand for credit can affect interest rates. A sudden increase in increase rates will require you to set aside more money to repay business loans, credit cards, and other business debts. If your small business has a limited cash flow, higher interest rates can curb your spending on things like inventory. The cash that you would have used to invest in your business will need to be shifted to interest payments. Locking in a fixed-rate business loan or equipment financing program can help you avoid this, as you will have predictable monthly payments.

Plan for success.

Your business plan is your road map to success, and it should include a financial section that includes an income statement, balance sheet, cash flow projection, and business expenses. Your operating expenses are the costs of keeping your company running smoothly, such as employee salaries, office rent, inventory, and business loan payments. One way to plan for success is to stay on top of the ever-changing interest rates, and don’t get into a financial situation that could end up hurting your company. For example, avoid overextending your credit, making late payments, and not keeping enough cash on hand.