How do rising interest rates typically affect companies?

• A. Increase their profit margins
• B. Lead to increased borrowing costs
• C. Encourage companies to expand rapidly
• D. Have no impact on corporate financing

Answer: (B)

Rising interest rates generally lead to increased borrowing costs for companies. When interest rates rise, the cost of servicing debt becomes more expensive, meaning that companies that rely on loans for financing their operations, expansion, or investments will face higher monthly payments. This can impact their cash flow, as they may need to allocate a larger portion of their budget to interest payments instead of investing in growth opportunities.

Additionally, higher borrowing costs can deter businesses from seeking new loans, which might have otherwise fueled expansion or operational improvements. Companies might become more cautious in their financial decision-making, focusing on managing existing debts rather than pursuing new projects that could contribute to growth. In this environment, overall business investment may slow down, affecting not just individual companies but the broader economy as well.

It's important to understand that while higher interest rates are intended to combat inflation and stabilize the economy, they can also create challenges for companies, particularly those that are heavily leveraged.