The Federal Reserve raised interest rates by 0.25% on Wednesday March 16 – the first rate increase since 2018 – and indicated that it would gradually raise rates throughout 2022. Small business owners could feel the impact of these rate increases with more expensive loans, higher credit card costs and slowing business growth as the Fed works to cool the economy.
While benchmark rates will still be relatively low – rates have been at or near 0% since March 2020 – small businesses and startups in particular may feel squeezed as rising interest costs eat away at already profit margins. thin.
1. More expensive business loans, more loan scrutiny
Existing fixed rate loans are immune to rate increases. Your rate is locked in for the duration of your loan.
The reverse is true for variable rate loans. Interest rates on existing trade lines of credit and other variable rate loans will rise each time the Fed raises rates, making payments more expensive.
The change won’t be dramatic – a 0.25% rate increase is likely – but the extra cost may mount for business owners, as several rate hikes are expected this year. If you have a variable interest rate loan, consider refinancing it to a fixed rate loan to stabilize costs.
Need new financing? “Get it fast and at a flat rate [so] you can plan your spending,” says Aleksandar Tomic, an economist and associate dean of Woods College of Advancing Studies at Boston College. “Even if [rates] are a little higher, you are protected against future increases.
But be prepared, because banks can be even more selective, Tomic says, making it harder for businesses to expand or invest in new equipment. Business owners can also turn to online lenderswho generally have higher rates but more flexible lending standards than traditional banks.
2. Credit card debt is getting more expensive
Credit card interest rates will be among the first to rise if and when the Fed raises rates, Tomic says. Higher rates mean higher monthly payments for business owners who have a balance on their business credit cards.
This could hit new businesses especially hard, as many startups rely on credit cards to get started. In fact, among entrepreneurs who started a business since March 2020, 39% said they used a credit card to fund the business, according to an August 2021 NerdWallet survey conducted by The Harris Poll.
Pay off any outstanding credit card debt promptly, if possible. Otherwise, look in a credit card balance transfer with a long 0% APR window.
To verify: Useful new features to look out for if you want a better credit card
3. Business growth could stagnate
The Fed’s move is aimed at curbing inflation, essentially moderating demand (and therefore prices) by making it more expensive to borrow money or buy on credit.
Consumer spending will likely slow as a result. Some industries will feel this more keenly than others. Businesses related to big-ticket items in need of financing could see weaker demand as buyers also face higher borrowing costs.
Business owners should test their operations now, when business is strong, to make sure they can weather a downturn, Tomic says.
“Make sure business is good,” he says. “Are you producing at the lowest possible cost? Are there any inefficiencies that you don’t deal with because business is good but that might surface under stress? »
To see: The Fed Got Inflation Wrong – And Now It Admits There’s No Quick Fix
How quickly will companies feel the effects of a rate increase?
It depends on the amount and type of debt your business is carrying, said Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, via email.
Businesses with variable rate debt, such as lines of credit or business credit cards, may have already seen rates rise as lenders anticipate the Fed’s next move.
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Those with long-term, fixed-rate loans, such as a U.S. Small Business Administration loan or a traditional term loan, are in better shape, Milan said. “They could be years away from seeing a major effect from a cash flow perspective.”
Kelsey Sheehy writes for NerdWallet. Email: firstname.lastname@example.org. Twitter: @KelseyLSheehy.