The Federal Reserve raised interest rates again last week.
For business owners, the obvious question is:
What will this do to my borrowing costs?
That’s worth asking.
But there’s another financing question I think is just as important:
Are you using the right kind of money for what you’re buying?
I’ve seen businesses create unnecessary cash problems not because the investment itself was bad, but because they financed it the wrong way.
A company buys equipment with its line of credit.
It uses working capital to fund a major expansion.
It finances something expected to produce value for seven years with money the business may need back in six months.
Everything looks fine—until the business needs that liquidity for something else.
The Fed Changed the Environment Again
On September 16, the Federal Reserve raised its target federal funds rate by a quarter percentage point to 3.75%–4.00%.
The Fed’s September projections also show a median federal funds rate projection of 4.1% at the end of 2026.
Nobody knows exactly where rates will go from here.
And I wouldn’t build a business plan around predicting them.
I’d rather ask a different question:
Does this financing structure still make sense if money stays expensive longer than we expect?
That’s a question management can act on.
Your Line of Credit Has a Job
Consider a business with a $1 million revolving line of credit.
The company has $800,000 available and needs a new piece of equipment costing $400,000.
The owner thinks:
We already have the line. Why go through another loan process?
So the company writes the check.
The equipment may be a perfectly good investment.
But the business has now consumed half of its available borrowing capacity.
Six months later, sales increase.
That’s good news.
Except accounts receivable also increases by $300,000.
Inventory has to increase another $150,000 to support the new orders.
Suddenly, the company needs $450,000 of additional working capital.
The business had the borrowing capacity.
It spent it on the machine.
That’s the problem.
The company didn’t necessarily make a bad investment.
It used the wrong money to make it.
Match the Money to the Asset
One basic principle I look at in financing is whether the duration of the financing reasonably matches what the money is being used for.
If you’re buying equipment that should produce revenue for seven years, financing it over an appropriate multiyear period often makes more sense than permanently consuming your revolving working-capital facility.
If you’re acquiring a business, the financing structure should reflect that business's expected cash generation.
If you’re purchasing real estate, that’s a long-lived asset and generally calls for long-term capital.
If you’re financing seasonal inventory that will turn into receivables and then cash within a few months, a revolving facility may make perfect sense.
Different capital has different jobs.
Problems start when we ask one type of capital to do another type’s job.
Working Capital Isn’t Extra Money
This matters especially with lines of credit.
An unused line can feel like money sitting around doing nothing.
It isn’t.
It’s liquidity.
And liquidity has value.
A business may need that borrowing capacity because:
A large customer suddenly takes 60 days instead of 30 to pay.
Inventory has to be purchased ahead of a seasonal rush.
A supplier offers favorable pricing for a large purchase.
A major piece of equipment unexpectedly fails.
Sales grow faster than collections.
A customer fails to pay.
The company experiences a temporary downturn.
Or an opportunity appears that requires immediate capital.
If you’ve already used the company’s working-capital facility to finance long-term assets, you have fewer options when one of those things happens.
Growth Can Actually Increase the Problem
This is one of the counterintuitive things about business.
Growth can consume cash.
Suppose a company sells $1 million a month and customers pay in approximately 45 days.
If sales increase substantially, the company may need to finance a larger receivables balance before it collects the cash.
If it’s an inventory business, it may also have to buy more product before making those additional sales.
Payroll may increase before customer payments arrive.
The business is growing.
The income statement may look better.
And the company’s cash requirements can increase at exactly the same time.
That’s why I don’t like unnecessarily consuming working-capital capacity.
You may need it precisely when things are going well.
The Cheapest Money Isn’t Always the Best Money
Owners understandably focus on interest rates.
If Loan A costs 6% and Loan B costs 8%, the 6% money looks better.
But you don’t make financing decisions based on interest rates alone.
I also want to know:
How long is the money available?
What is the amortization schedule?
Is the rate fixed or variable?
What collateral is required?
Are there financial covenants?
Can the lender reduce or terminate the facility?
Are there prepayment penalties?
What happens if the business has a bad quarter?
How much liquidity remains after the transaction?
The lowest interest rate can become very expensive if the financing structure puts the business in a cash crunch.
Stress-Test the Financing Before You Sign
Before making a significant capital commitment, I like to make the assumptions worse.
What happens if revenue is 10% below plan?
What happens if customers take 15 days longer to pay?
What happens if the project takes six months longer to produce the expected return?
What happens if interest rates don’t decline?
What happens if inventory requirements are higher than expected?
What happens if another major capital need appears six months from now?
If the financing only works when everything goes according to plan, I don’t think you have a financing plan.
You have a best-case scenario.
Businesses need room for things to go wrong.
Because eventually something will.
Preserve Your Options
I’m not arguing that businesses should avoid debt.
Used properly, debt can be an excellent tool.
It can finance equipment, acquisitions, real estate, inventory, and growth without requiring owners to give up equity.
But the structure matters.
When I’m looking at financing, I’m not simply asking:
What’s the interest rate?
I’m asking:
What are we financing, how long will that asset produce value, how will the debt get repaid, and what financial flexibility will the company have left afterward?
A seven-year asset doesn’t necessarily need exactly seven-year financing.
But it probably shouldn’t be financed with money the company might desperately need next month.
That’s how a good investment can become a cash-flow problem.
Before You Commit the Capital
If you’re considering equipment, an acquisition, expansion, or another significant investment, the question isn’t simply whether you can obtain the financing. The structure needs to work with the company’s cash flow, working-capital needs, and downside scenarios.
I work with business owners to evaluate financing and capital decisions in the context of the entire business—not simply the quoted interest rate.
Learn more about how I work with business owners at RobertRitch.com →
Sources
Federal Reserve — FOMC Statement, September 16, 2026
https://www.federalreserve.gov/newsevents/pressreleases/monetary20260916a.htm
Federal Reserve — Summary of Economic Projections, September 16, 2026
https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20260916.htm