Interest rates jumping up and down can be a real headache for businesses. High interest rates don't just make loans more expensive, they also change how companies handle their money. The surprise is that the worst effects aren't immediate.  Instead, it's the delayed reactions that can hurt them the most.

Businesses often start to replace one type of financing with another when interest rates go up.  They might borrow money from their supply chain instead of a bank.  This can be a risky move. It gets in the way of long term plans especially if the new borrowed money is meant to be paid back quickly. This can lead to big investment plans falling apart.  It's like saying "Look—here's some cash! But be back tomorrow. " It's not a good way to make sure business plans stay on track. Some companies skip out on paying suppliers because they're suddenly short on cash. Then one of two things happens—either the supplier has no cash, or the company still has lots of money because it is negotiating holds on costs. This becomes a big problem.  Bad planning and profit-seeking can make the company even more unstable.

Businesses can get into a bad habit when managing cash.  Especially during times of interest rate change.  The problem? Overcapacity. It's when a business has more stuff than it can deal with.  Long term high interest rates can cause production to skyrocket, but sales might not rise as fast. This mismatch can leave companies stuck with too much stuff which can really hurt their long term stability.  This is an important finding. Regardless of the time frame, short term or long term, the interest rate changes can really wreck havoc inside the company.

China's construction industry is a great example of this.  Researchers took a look at industry data and showed that interest rate changes are  behind the boom and bust cycles in construction companies.   They pointed out the negative affect of changing interest rates are more prolonged than initially thought.

The construction industry in China has taken a real hit from sudden changes in interest rates.

This begged the question—what can policymakers do to help?

This is a serious point to ponder on. There are steps to consider. First step—alertness. Second step—quick action. If interest rate hikes happen too quickly, companies might not be ready for them.  Polices need to be quick to resolve or help companies with the negative effects of those changes. Long term, however, policies should do more to change the construction industries' practices. It also needs to  encourage innovation to keep up with global challenges.

Shaking Hands with Dangers - What Interest Rate Hikes Mean for Businesses

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