The Interest Rate Increase and Its Impact on Working Capital: A Challenge for Businesses

After a long period the interest rate are increasing again.
This has impact on your working capital.
How does your organisation handle this?

How does your organisation handle this?

increased interest rate: Advantage or disadvantage?

The interest rate increase is a phenomenon that attracts global attention, particularly among businesses that rely on working capital to finance their day-to-day operations. Working capital, which represents the difference between short-term assets and short-term liabilities of a company, forms the basis for operational efficiency and liquidity. In this blog, we delve into the interest rate increase and its potential impact on the working capital of businesses.

The Importance of Working Capital

Working capital is crucial for businesses of all sizes and sectors. It enables them to meet their ongoing obligations, such as paying suppliers, salaries, and other operational costs. Moreover, sufficient working capital provides a buffer for unexpected events, such as changes in market conditions or economic downturns.

Interest Rate Increase and Its Influence on Working Capital

An interest rate increase has direct and indirect consequences for a company’s working capital. Let’s first examine the direct impact.

  1. Increased Interest Costs: An interest rate increase leads to higher borrowing costs for companies with loans and credit lines. This means that businesses have to allocate more funds to interest payments, reducing their available working capital. This can be especially challenging for companies with high debt levels or those reliant on short-term financing.
  2. Changes in Investment Behavior: Businesses may become more cautious about making new investments or carrying out expansion plans due to higher interest rates. This can result in reduced growth and a limitation on the working capital needed for such investments.

The indirect impact of an interest rate increase on working capital is equally significant.

  1. Lower Consumer Spending: Higher interest rates can discourage consumer spending, especially for significant purchases such as automobiles, homes, or durable goods. This can lead to a slowdown in product and service sales, requiring businesses to adjust their inventory and reassess their working capital.
  2. Asset Depreciation: An interest rate increase can also cause asset devaluation, such as real estate or stocks, which can negatively affect a company’s working capital. This can be particularly detrimental to businesses relying on assets as collateral for loans or financing.

Addressing the Challenges

While an interest rate increase may present challenges for businesses regarding working capital, there are measures they can take to prepare and respond:

  1. Liquidity Planning: It is essential for companies to develop accurate liquidity plans to gain better insights into their financial position and identify potential risks. This enables them to take appropriate measures promptly to address working capital shortages.
  2. Diversification of Funding Sources: Businesses may need to explore alternative funding sources, such as attracting venture capital, issuing stocks, or diversifying their lenders, to reduce reliance on short-term debts susceptible to interest rate increases.
  3. Efficient Inventory Management: Optimizing inventory management can help reduce the need for working capital. This includes monitoring demand, minimizing inventory levels, and improving supply chain efficiency.


An interest rate increase can have a significant impact on the working capital of businesses, posing challenges in terms of financing and operational efficiency. It is crucial for businesses to be aware of these potential consequences and take proactive measures to prepare and adapt to changing market conditions. Through careful liquidity planning, diversification of funding sources, and efficient inventory management, businesses can enhance their working capital positioning and become more resilient in an environment of rising interest rates.