The biggest challenge facing US small businesses? Rising interest rates
The Federal Reserve chair, Jerome Powell, has been warning for some time that it takes time for interest rate rises to filter through to the real economy. Well, here we are.
Since March, 2022 the Fed has increased its federal funds rate – the rate it charges to its member banks to access money – from 0.25% to 5%. That’s a 20-fold increase in just a year. The Fed meets again this week – and may raise rates again.
When a cost goes up by that much in such a short time, it ultimately has an impact. And now not only have borrowing costs for investors and businesses exploded, but the unusually quick rise of interest rates has caused some banks to miscalculate their money management, all with consequences.
I’ve been seeing this all year at my clients. The prime rate is now at 8%, almost three times the level it was just a year ago. And this is the prime rate, which is used for the best and most credit-worthy of businesses. Few small businesses get that rate. Most are looking at rates between 9 and 12% on new or refinanced loans for working capital, equipment and property purchases. The high rates are causing many to rethink their inventory purchases, investments and hiring.
And that’s for existing businesses with employees, collateral and a financial history. Things are worse for startups and early-stage businesses. A new survey of more than 500 small and mid-sized businesses found that 76% of them only had enough cash to operate for 60 days. As traditional banks circle the wagons, many of these smaller firms are forced to look elsewhere for financing – such as online lenders – and at much higher costs.
The current situation is tough and getting tougher. But there are some options. I’ve been telling clients to seek out loans from
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