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Explain how businesses are affected by a decrease in interest rates.?

Author : Lama

Submitted : 2018-02-26 03:08:11    Popularity:     

Tags: affected  businesses  Explain  rates  interest  

they are able to pay more wages, buy more equipment, make improvements to their system It decreases the cost of debt. In simple terms, a decre

Answers:

they are able to pay more wages, buy more equipment, make improvements to their system

It decreases the cost of debt.

In simple terms, a decrease in interest rates is a reduction in the cost of money. So businesses can borrow more money when the interest rates go down. There are two major reasons for a small business to borrow: to make payroll and to make a capital investment.

Payroll has to be made on regular schedule. If the business is short of operating funds during some pay period it has to take out a short term loan to pay its employees. When the interest rates are low, subsequent revenue is expected to cover the loan and pay it off. If the rates are high, however, paying off that short term loan becomes more problematic. If the business continues to have troubles paying off its loans, it could default and be forced to go into bankruptcy.

It's similar for capital investments. The business borrows to expand its plant and even branch out with new additional facilities. So it borrows the funds to do it. And paying off the loan is once again easier to do when the interest rates are lower. But there are some significant differences between capital investment and payroll.

First, capital investment loans are typically long rather than short term. And the interest rates are normally lower than the short term ones. But the major one is that, barring some catastrophic event like a fire or tornado, capital investment is discretionary where payroll is not.

That is business must do the payroll, but they don't have to invest in new capital. So as capital investment is typically discretionary, the cost of money is a major driver in making the decision to invest or not. Which means a drop in interest rates could result in a spate of capital investments and expansions by businesses.

If the businesses are in the habit of borrowing money, their costs go down when interest rates fall. And, the low interest rates may induce them to borrow more and make capital expenditures.

On the other hand, my business is a private lending business, and I make more money when rates are high (because my money is NOT borrowed) ! OTOH, if I have made a long-term loan, its value (to me or to anyone else) decreases if rates go up during its term.

people think they have more money then..a hoodwink



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