The economic variation have affected the operation of companies. This is because inflation, the rise in the dollar, the fall of the Stock Exchange and interest rates not only impact consumption and, consequently, sales but also influence access to credit and return on investments.
Given this, it is important to understand how interest rates work, as they are present in every type of financial transaction we make, such as loans, investments, overdrafts, and credit cards.
What are interest rates?
Interest is an amount paid on an amount, based on how long that money has been borrowed or invested. In other words, when the bank lends you money, it determines how soon you must start paying back that loan and sets a percentage, which will be levied on the amount borrowed and must be returned to the institution in addition to the initial amount.
Example: suppose you got a credit of BRL 10,000 and what was agreed in the contract was that the return would be BRL 11,000 and made after one year. This difference between the amount borrowed and the amount returned is interest.
In this case, the interest rate was 10% per year. The same logic goes for when you make investments. The money invested is like a loan from you to the bank and, therefore, interest is charged on the value. Therefore, investments are synonymous with a capital increase, because when you invest, the banks pay you interest.
What are the main types of interest?
- Simple interest and compound interest
In simple interest, the rate is applied only to the initial amount and does not change. With compound interest, the so-called “interest on interest” takes place, that is, the rate is calculated initially on the value of the loan and, later, on the value of the previous interest. That is, they can cause a “snowball effect”, where the amount to be paid increases progressively while the debt lasts.
- Nominal interest and real interest
Nominal interest is the one that takes into account monetary correction and inflation rate; real interest, on the contrary, does not include these items in the calculation.
- interest on arrears
Interest on late payment is that fee that your company has to pay when a payment is late.
- Interest on equity
Interest on equity is the rate calculated based on a company’s profit. This amount is generally distributed among the shareholders.
But what about the Selic rate?
The Selic is the basic interest rate in our country, that is, it impacts all others. Its percentage is defined by the Central Bank, based on the Copom (Monetary Policy Committee) meeting, which takes place every 45 days, and determines the rate applied by the government in the payment of investments in the National Treasury.
In practice, the Selic rate works to control the country’s inflation. To reduce the inflation rate, the Central Bank raises the Selic rate, making borrowing, financing, and consumption, in general, more expensive.
How can interest rates influence your business?
When the Selic rate rises a lot, it causes a cascading effect on all other rates, that is, access to loans, financing, and even consumption is harmed. At the same time, a higher Selic rate can indicate a better return on investment, in addition to helping to control inflation. And all this combined impacts consumption, sales, credit, and the size of the debt.
Use interest rates in your company’s favor
Now that you understand better how interest rates work and how they impact your business, it will be easier to plan, right? This way, you understand the best time to access lines of credit, have more strategies to pay off debts, and more conditions to develop actions that focus on your expansion.