Interest rate hikes impact everyone, and small businesses are no exception.
In an effort to curtail inflation, the Federal Reserve is increasing interest rates for the first time since 2018.
Higher interest rates can impact small businesses’ cash flow and their ability to borrow, reinvest, and even hire workers.
Seven out of 10 small business owners now cite the impact rising interest rates will have on their businesses as a concern on their radar.
Recent studies show that small businesses are indeed bracing for some financial fallout from the planned interest rate hikes.
According to the most recent MetLife and U.S. Chamber of Commerce Small Business Index, for instance, 70% of small business owners now cite the impact rising interest rates will have on their businesses as a concern to watch. Inflation, which goes hand in hand with interest rate hikes, ranks as their top concern overall.
Why Has the Federal Reserve Raised Interest Rates?
Interest rates had been near 0 since the pandemic, and the Fed had been hesitant to raise rates while the U.S. economy was still dealing with the effects of the coronavirus pandemic. However, the economy is now dealing with significant inflation that affects both businesses and their customers. Rate hikes are designed to help slow inflation down.
How much they will help remains to be seen, but this rate increase part of the Fed’s efforts to curb inflation and protect the economy.
The Impact of Fed Interest Rates on Small Businesses
Small business borrowing (aside from COVID relief loans) has recently begun to recover from pandemic lows with banks and other lenders reporting increasing demand.
Business owners searching for financing in the next few months will notice higher rates. Since business loans often involve larger loan amounts, they are likely to notice the effect of higher rates more quickly than consumers who have loans with smaller balances.
Even so, there has been much discussion about how higher interest rates impact consumers. It’s important to understand that higher rates also can have an impact on small businesses.
How rising interest rates affect business
Debt becoming more expensive as interest rates rise can lead to negative outcomes for entrepreneurs:
- Growth becomes more difficult:
A lot of growth is fueled by debt, such as taking on a loan to buy new machinery or acquire another business. When interest rates are higher, it’s more expensive to service that debt, meaning that investing in growth may not look so attractive when you factor in costs of capital.
- Customer spending and saving
Changing customer spending habits triggered by rising interest rates may also reduce cash flow. When consumers have to pay higher interest on personal loans, including mortgages and auto loans, they have less disposable income to buy goods and services.
- Cash flow
Small businesses tend to operate with limited cash flow, so when interest rates rise, the additional cash needed to repay loans can be scarce. In addition, short-term loans to cover cash flow gaps may be difficult to qualify for or too pricey to afford.