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Interest rates can alter the profits investors make, the yield businesses gain from savings accounts and the rate you pay on your credit cards. They can affect almost every business directly or by their influence on buying decisions. The specific way interest rates affect a given company depends on the business model and how the company manages capital.
Sales and Services
Businesses that rely directly on consumer purchases are indirectly impacted by investment interest rates when those rates alter buying decisions. For example, someone who gains less money in interest on her savings account than she anticipated might be more conservative when making purchases, resulting in decreased profits for consumer-oriented companies. An increase in savings interest rates, by contrast, may encourage consumers to spend more because they're earning more, increasing the profits of sales-driven businesses.
Banking and Loans
High interest rates can inhibit business start-ups and cause established businesses to scale back on purchases that require loans. A dentist might opt not to buy a new building if the mortgage rate he'll pay is too high. While banks and lenders can make significant profits from high interest rates, they may lose money if loan rates are so high that consumers and businesses default or opt not to seek loans.
Stocks and Investments
Although interest rates don't typically have an immediate or direct effect on the stock market, changes in interest rates can affect the rate at which investors buy and sell stocks. Higher interest rates can lead to a slowdown in demand which can affect the stock market. Changes in stock prices that are an indirect result of interest rate changes can affect the individual business selling the stocks as well as investment firms. Because investments often act as a form of savings, the effects of changes in the stock market can be similar to changes in interest rates on savings accounts.
Any business can be affected by interest rates. A local coffee shop that takes out a loan, for example, can lose money if the loan's rate changes. Small business owners who rely on credit cards to finance their operations may find themselves in trouble if their rate climbs. Businesses that rely on yields from savings accounts can be flush with cash if interest rates climb but lose money if interest rates crash.
- Ernst & Young: IFRS Changes Impacting the Banking Industry
- 24/7 Wall Street: Low Interest Rates Affecting Your Life Insurance Company
- Northrop Grumman: How Do Interest Rates Affect the Economy?
- Bloomberg: Who Loses When Fed Keeps Interest Rates Low?
- American Association of Individual Investors: Don't Fight the Fed -- Interest Rates and Their Impact on the Stock Market
Van Thompson is an attorney and writer. A former martial arts instructor, he holds bachelor's degrees in music and computer science from Westchester University, and a juris doctor from Georgia State University. He is the recipient of numerous writing awards, including a 2009 CALI Legal Writing Award.