When the benchmark interest rate rises, the cost of obtaining funds usually increases as well. Companies that have floating interest loans can face larger interest payments so that some of the cash flow that could previously be used for operations, expansion or investment must be diverted to pay these obligations. The impact can be felt quite strongly in companies that have large debts or are highly dependent on external financing. Companies may also become more careful about taking out new loans because capital costs are becoming more expensive.
The impact doesn't stop with borrowing costs. High interest rates can also make consumers and other companies reduce spending because financing costs increase. If demand falls, company revenues could also be depressed. Therefore, companies need to maintain liquidity and recalculate investment plans when interest rate conditions change. Businesses that have strong cash flow and controlled debt are usually better able to withstand rising interest rates than companies whose growth relies heavily on debt.
