Management includes developing a corporate atmosphere for personnel and employers to work collaboratively to accomplish the company’s goals. Therefore, business management encompasses the coordination and administration of company activities (Khanka and Gupta, 2022). Managers monitor procedures and assist employees in achieving optimum performance. In addition to supervising and training new personnel, a business executive may help an organization achieve its financial and operational targets. Business management is essential to a company’s productivity, regardless of sector, may gain from skilled entrepreneurial administrators with knowledge of guiding principles and pertinent processes. Lastly, the primary objective of a business supervisor is to guarantee that a company is both functioning and prosperous, which is why business management is such an essential profession.
Small and medium enterprises (SMEs) encounter numerous operational and financial obstacles. These impediments include credit rationing, inadequate financing, lack of appropriate paperwork, the absence of security, and exorbitant borrowing costs. These obstacles significantly affect expansion, competitiveness, and economic liberalization. As such, this essay discusses the financial challenge of higher interest rates among SMEs that hinders their functional capability. As such, the paper identifies some of the causes of the challenge, promotes recommendations for the problem, and assesses the appropriateness of the suggestions that have been applied to solve the concern.
High Interest Rates
Interest rates allude to the charge of borrowing funds or, on the other hand, the remuneration for the offering and vulnerability of loaning. In both cases, it maintains economic activity by empowering people to lend and spend. Whether a creditor, depositor, or both, one must understand the rationale behind these modifications and distinctions (Nguyen et al., 2022).
In addition to the danger of default, there is also the probability of inflation. When people lend money presently, the costs of items and services may increase by the moment they are repaid, decreasing the discretionary income of individuals’ money. Therefore, interest safeguards against future inflationary increases. Depositors make payments because they must be compensated for obtaining the capacity to spend immediately instead of saving for years (Nguyen et al., 2022). A person, for instance, acquires a mortgage for a residence that they cannot currently pay upfront, but the loan enables them to become property owners sooner rather than later. The following are some causes of higher interest rates within a jurisdiction.
Increased Supply and Demand
The producers and consumers influence the degree of lending rates for credit. A rise in the demand for consumer loans will result in higher interest rates, while a decline in financing will result in lower interest rates (Azizovna et al., 2022).
Inversely, a rise in bank lending will cut interest rates, while a reduction in credit supply will surge them. The greater the capacity of SMEs like financial institutions to lend, the more cash is accessible to the economy. As the provision of credit rises, the expense of borrowing, or interest, falls. In addition, the credit offered to the market reduces when SMEs elect to delay debt repayment. When SMEs delay settling their monthly credit card payment until the next month or even later, they increase the percentage of interest, and they will need to incur and reduce the quantity of credit available to them (Del Negro et al., 2019). In turn, this will boost interest rates in the economy, rendering them ineffective. The inability to conduct business results in the discontinuation of SME operations.
Inflation
The likelihood that interest rates will increase increases with the inflation rate. This is because creditors will require greater interest rates to compensate for the decline in buying power of the cash they receive in the future (Şen et al., 2020). When interest rates increase, small and medium-sized enterprises’ borrowing costs rise. This renders lending costly; hence, borrowing will reduce, causing a reduction in the monetary base or the amount of money in circulation. SMEs will have fewer funds to spend on products and services if the supply of money falls. Consequently, they will purchase fewer products and offerings. This will result in a decline in the demand for merchandise and services (Şen et al., 2020). With a stable supply and a diminishing necessity for items and services, the value of products and solutions will fall.
Government Activities
The government influences how borrowing rates are determined and enacted within its markets. The US Federal Reserve (the Fed) frequently issues statements regarding the consequences of monetary regulations on interest rates (Yared, 2019). The federal capital proportion, or the ratio that establishments charge each other for exceptionally short-term transactions, influences the interest rate institutions to establish the capital they issue. This rate is ultimately reflected in additional short-term borrowing costs. The Federal Reserve controls these rates through open market operations, which involve purchasing and selling previously announced US bonds (Yared, 2019). When the state sells instruments, money from the financial institutions is used for the purchase, leaving the banks with insufficient resources for lending and causing interest rates to rise.
Recommendations for Higher Interest Rates
If a country’s economy were a human body, then the monetary authority would be its heart. Similarly to how the heart distributes life-sustaining blood all over the body, the central bank feeds cash into the economy to maintain its functionality and thriving. Based on the economic climate and the central bank’s strength, central banks’ techniques to regulate interest rates differ. The Federal Reserve, also known as the Fed, is the central bank in the USA. As explained, the following are some methods for lowering lending rates in a sector to improve the functioning of SMEs.
Open Market Operations (OMO)
Open market operations (OMOs), the sale and purchase of state assets on public financial platforms, implicitly influence interest rates. OMOs are an economic policy instrument that enables a central bank to regulate the monetary supply in a country (Brunnermeier and Niepelt, 2019). Dependent on market performance, central banks may pursue deflationary or spending increases monetary policy. OMOs, which correspond to the acquisition and disposal of Treasury securities, are shown via reverse repurchase arrangements. OMOs are a tool with which the Federal Reserve can boost or lower the interest rates and money supply by buying and selling securities. The famed balance sheet of the Federal Reserve increases when the Fed purchases bonds and decreases when it trades them (Brunnermeier and Niepelt, 2019). Buying assets increases market liquidity and puts downward tension on interest rates, allowing SMEs to operate efficiently.
Introduce Quantitative Easing Initiative
Central banks can expand their open market operations in terrible economic conditions, including quantitative easing. Under the monetary expansion, financial institutions create cash and use it to purchase state bonds and other assets and investments (Wu et al., 2019). These funds enter the banking industry as compensation for the assets acquired by the central bank. This sum is added to the institutions’ deposits, which stimulates banks to extend more loans (Wu et al., 2019). It also helps to reduce long-term borrowing costs and boost the investment of businesses like SMEs.
Federal Funds Rate (FFR)
Federal Reserve does not ultimately influence the cost of borrowing. Instead, the FOMC proclaims an optimal condition for the FFR and then modifies two other borrowing costs. The federal funds rate is the interest rate that a bank holds overnight. Interest on reserves (IOR) and the overnight reverse repurchase agreement (ON RRP) standard bring interbank percentages into the appropriate fed funds rate level (Iacoviello and Navarro, 2019). IOR is the interest rate banks receive on savings with the Federal Reserve. Since the United States has never faltered on its obligations, the IOR is regarded as a risk-free proportion and the minimum interest rate that any rational creditor should charge.
Similarly, the ON RRP rate operates and exists since not all financial companies have reserves at the Federal Reserve. The ON RRP permits these institutions to buy a government bond at night and resale it to the Fed the following day (Kuttner, 2018). The ON RRP ratio is the disparity between a security’s purchase and sale price. The Federal Reserve empowers banks and providers to raise riskier loan rates by increasing these rates (Kuttner, 2018). Therefore, this will funnel more of their capital to the no-risk Federal Reserve, decreasing the money supply and lowering interest rates.
Evaluation of Solutions
The Development Assistance Committee (DAC) defines evaluation using four factors: appropriateness, usefulness, efficiency, and durability. First, appropriateness refers to the degree to which the objectives of a proposal correspond with the aspirations of consumers, the needs of the country, worldwide goals, and the tactics of partners and funders (Tolubko et al., 2018). The recommendation, open market operation, would reduce interest rates in the short-term depending on the country’s economic conditions. The solution, introducing quantitative easing initiatives, is effective as it works to meet the needs of businesses in the long-run by regulating interest rates charged by financial institutions. On the other hand, the federal funds rate is a long-term solution to reducing interest rates within an economy and thus works to meet SMEs’ current and future prospective needs.
Secondly, usefulness describes the extent to which the intended outcomes of the solution were realized or are predicted to be realized based on the significance of those outcomes. All three suggestions illustrated in the previous section are essential to SMEs as they would cut costs incurred from borrowing funds to start or expand their business operations. However, OMO and introducing quantitative easing programs act in the short-to-medium-term while the federal fund level operates in the long-run as it is constituted.
Thirdly, the efficiency criterion refers to how efforts and materials, such as money, expertise, and time, are converted into results. In many nations, open market operations are frequently utilized since they are adaptable, user-friendly, and effective. As a result, with low-interest levels, SMEs would find it easy carrying out their management operations. The implementation of quantitative easing initiatives has proven to be an effective mechanism. Following the 2007–2008 economic meltdown, the Bank of England and the Federal Reserve implemented quantitative easing initiatives to salvage businesses from its effects (Hassel et al., 2020).
Nonetheless, it is a short- to medium-term approach and may affect SMEs started after such programs have been implemented. The FFR is equally efficient, as it monitors the economic activities within an industry by ensuring that institutions maintain a specific interest rate.
Lastly, the sustainability factor refers to the growth benefits resulting from the deployment of a solution. Open market operations are not durable as it aims to solve the higher interest rates within an economy in the short-term. Introducing quantitative easing initiatives would also be non-durable as it functions to reduce interest rates in the short-term. On the other hand, the FFR is sustainable since it is a lawfully instituted approach to help regulate the rate of interest within an economy. From the three recommendations, the FFR seems effective as it fulfills all four criteria for evaluating a solution as suggested by DAC. As such, nations should strive to maintain their economic interest rates at levels desirable to promote SMEs.
Conclusion
Management comprises fostering an environment in which employees and employers may collaborate to achieve the organization’s objectives. Consequently, business management involves the coordination and management of firm activities. Small and medium-sized businesses face several operational challenges. These obstacles include credit rationing, inadequate financing, the absence of collateral, and high borrowing fees. Interest rates refer to the cost of borrowing cash or the payment for the provision and risk of lending. In both instances, it sustains economic activity by encouraging lending and spending. Whether a creditor, a depositor, or both, one must comprehend the logic underlying these alterations and distinctions.
A rise in consumer credit demand will result in higher interest rates, whereas a fall in financing will result in lower rates. Consequently, the inflation rate raises the possibility that interest rates will rise. When the state sells instruments, the financial institutions’ funds are utilized to purchase them, leaving the banks with insufficient funds for lending and causing interest rates to rise. OMO, the introduction of quantitative easing initiatives, and the FFR are appropriate approaches for lowering interest rates within a sector to reduce the elevated inflation rate. As a result, governments should endeavor to keep their economic interest rates at levels conducive to SME development.
Reference List
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