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Higher interest rates hurt all borrowers. But they hit small businesses extra hard. Unfortunately, for small companies, higher borrowing costs are unlikely to ease much anytime soon. So, many small firms will cut back on plans to hire, expand or invest in new capital equipment.
Just how much costlier is credit these days? In 2019, the prime rate, the benchmark rate for loans to small borrowers, was 5.5%. Now, it’s up to 8.5%. Small firms are paying 9.1% on average, per the National Federation of Independent Business. And even that may be an understatement.
Owners of small businesses often depend on credit cards or personal loans, which carry rates far higher than corporate bank loans usually do. Interest costs are nearing 7% of revenues for small-business borrowers. In 2021, they were 6%. If rates hold steady, the figure will hit 8% by 2030.
Credit has gotten notably tighter, too. Just 13% of small-business loan applications to large banks are getting approved these days, roughly half the rate back in 2019. Smaller banks and credit unions are now approving 20% of small business applications, vs. 40%-50% in 2019.
Large companies face tougher standards, too. But many of them can borrow directly by issuing bonds or commercial paper, albeit at the highest yields in many years. For many small businesses, there’s no choice but to cut back — fewer hires, delayed purchases of needed equipment, holding off on moving to a bigger space, etc.
Business, overall, is OK, but many small companies can’t finance the investments to grow. (If you sell to small firms, you’re already seeing this belt-tightening. Unfortunately, there’s little hope of it ending anytime soon. If anything, expect more retrenchment.)
One upside of higher rates: Some small firms can earn more on their cash if they carry significant cash balances. The days of 0% on savings accounts are over. There are also some alternate credit sources small firms may be able to tap: Loans and loan guarantees from Uncle Sam, in particular.
Various programs run by the Small Business Administration aim to help small companies access credit. For example, the SBA 7(a) loan program provides loans that can be used for working capital or to buy a business at the prime rate plus a margin the borrower and lender agree to. SBA 504 loans can be used to purchase owner-occupied commercial properties.
The Department of Agriculture provides loan guarantees to small businesses in rural areas through its Business and Industry Loan Guarantees Program. A wide range of loans are eligible, with guarantees of up to 80% of the amount borrowed for many purposes.
Even some private grants are available to small companies. For instance, Verizon offers $10,000 awards plus consulting via its Small Business Digital Ready program.
This forecast first appeared in The Kiplinger Letter, which has been running since 1923 and is a collection of concise weekly forecasts on business and economic trends, as well as what to expect from Washington, to help you understand what’s coming up to make the most of your investments and your money. Subscribe to The Kiplinger Letter.
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