The Fed Raises Interest Rates: The Impact on Small Businesses
The Fed Raises Interest Rates: The Impact on Small Businesses

The Federal Reserve announced today that it has raised a key interest rate by 0.25%, moving the target range for the federal funds rate from 0 to 0.25 to 0.50%. The federal funds rate is a benchmark interest rate that often affects other interest rates such as the prime rate. This is the first of several interest rate increases expected in 2022, and consumers and small business owners will be affected.

Many small business owners have endured a brutal few years and are still grappling with lingering challenges from the pandemic, rising costs, supply chain issues and a tight labor market. The Fed’s rate hike may seem like another setback.

Here’s how the Fed’s rate hike could impact small business owners and what to do to help your business weather rising rates.

Why did the Federal Reserve raise interest rates?

Interest rates have been near zero since the pandemic, and the Fed has been reluctant to raise rates as the U.S. economy still grapples with the effects of the coronavirus pandemic. However, the economy now faces significant inflation that affects both businesses and their customers. Rate hikes are designed to help slow inflation.

How much they will contribute remains to be seen, but this rate hike is only the start of the Fed’s efforts to rein in inflation and protect the economy.

The impact of Fed interest rates on small businesses

Small business borrowing (apart from COVID relief loans) has recently begun to recover from pandemic lows, with banks and other lenders reporting growing demand.

Business owners looking for funding over the next few months likely won’t see much of a difference when looking for financing. However, since business loans often involve larger loan amounts, they may notice the effect of higher rates more quickly than consumers who have loans with smaller balances.

Business owners with outstanding loans may see rates increase, depending on the types of loans they take out. Here’s how it will impact some of the post-popular funding types:

Lines of credit: Variable interest rates are common on lines of credit, meaning the rates businesses pay on this popular form of small business financing are likely to increase. This first rate hike should have minimal impact for borrowers with small balances, but for those with large balances, this rate hike and subsequent rate hikes can result in noticeable increases in payments.

Business credit cards: Most credit cards have variable rates tied to the prime rate, which in turn is influenced by the federal funds rate. That means rates will go up for the vast majority of business owners with credit cards. This initial rate hike is relatively small and minimum payments for business owners are unlikely to be significantly affected. However, some companies have significant credit card debt. And with rates likely to rise again, costs will rise. Also, those who rely on 0% balance transfers or introductory offers may find that the rate after this offer expires is higher than expected.

SBA Loans: Borrowers who have taken advantage of the low-cost COVID-19 Economic Disaster Loans (EIDLs) will not be affected by this increase, as these loans have a fixed rate of 3.75% for the duration. of the loan. Other SBA loans, including the popular 7(a) program loans, offer both fixed and variable interest rates and the latter will be affected by future rate increases.

Of course, business owners are also consumers and may find their personal wallets tight as their consumer credit card rates rise or if they seek mortgages or car loans.

How much should fares increase in 2022?

Fed officials said it was the first of several rate hikes planned for 2022, with six more rate hikes possible this year. Seven-quarter rate hikes would mean that by the end of the year, the target federal funds rate could be between 1.75 and 2%. Further rate hikes will make borrowing costs higher for many small business owners.

Future interest rate hikes will depend on many different factors, including how long the US economy struggles with high inflation, whether another variant of the coronavirus causes future lockdowns, how long oil prices continue to rise stay high and even what is happening in the Russia/Ukraine war. As the Fed’s Summary of Economic Projections notes, “As with real activity and inflation, the outlook for the future course of the federal funds rate is subject to considerable uncertainty.”

It seems quite clear, however, that rates will likely continue to rise throughout this year and next, and business owners need to be prepared.

How Small Businesses Can Cope With Rising Interest Rates

There are several ways business owners can deal with rising interest rates:

  1. Get financing as soon as possible. Some business owners have been hesitant to borrow during the pandemic, and with good reason. But waiting too long for funding can mean settling for higher cost funding or even potentially not qualifying at all. At a minimum, business owners without a line of credit should consider getting one.
  2. Dealing with credit card debt. Pay off high-rate credit card debt if possible, or refinance it with a low-rate credit card balance transfer or even a term loan. Consider shopping around for a low rate credit card.
  3. Refinance variable rate loans. Consider refinancing a variable rate loan with a fixed rate loan. Despite this rate hike, interest rates remain globally attractive for many types of trade finance. Now might be the time to get a loan with a fixed interest rate and predictable payments.
  4. Focus on financial health. The lowest rates often go to borrowers in good financial health. This includes those with good credit scores (personal credit and/or business credit) and strong incomes documented by business bank statements. Strong credit and income can help entrepreneurs qualify for the best business loans.

Business owners can turn to Nav to help them find the best business financing. With Nav, business owners can seek financing from various lenders without affecting their credit score. They will be matched with lenders based on their unique data and qualifications. And they’ll get unique insights into their business’ financial health to help them qualify for better financing in the future.

This article was originally written on March 16, 2022.

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