3 Ways Small-Business Owners Will Feel a Fed Rate Increase
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The Federal Reserve is expected to raise interest rates this week, with additional hikes likely throughout 2022. Small-business owners could feel the impact of those rate increases with more expensive loans, higher credit card costs and slower 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 — smaller businesses and startups in particular may feel squeezed as rising interest costs eat into already thin profit margins.
1. Pricier business loans, more lending scrutiny
Existing fixed-rate loans are immune to rate increases. Your rate is locked in for the life of your loan.
The opposite is true for variable-rate loans. Interest rates for existing business lines of credit and other variable-rate loans will increase every time the Fed raises rates, making payments more expensive.
The change won’t be dramatic — a 0.25% rate increase is likely — but the added cost can creep up on business owners as multiple rate hikes are expected this year. If you have a loan with a variable interest rate, consider refinancing to a fixed rate loan to stabilize costs.
Need new funding? “Get it quickly and at a fixed rate [so] you can plan your expenses,” says Aleksandar Tomic, economist and assistant dean at Boston College’s Woods College of Advancing Studies. “Even if [rates] are a little bit higher, you are protected against future increases.”
But be prepared, as banks may be even more selective, Tomic says, making it harder for businesses to expand or invest in new equipment. Business owners can also look to online lenders, which typically have higher rates but more lenient lending standards than traditional banks.
2. Credit card debt becomes more expensive
Credit card interest rates will be among the first to rise if and when the Fed raises rates, Tomic says. Higher rates translate to higher monthly payments for business owners who carry a balance on their business credit cards.
That could hit new businesses especially hard, as many startups rely on credit cards to get off the ground. 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 soon, if possible. Otherwise, look into a balance transfer credit card with a long 0% APR window.
3. Business growth could stall
The Fed’s move is intended to curb inflation, essentially tempering demand (and therefore prices) by making it more expensive to borrow money or buy with credit.
Consumer spending will likely cool off as a result. Some industries will feel that more acutely than others. Businesses tied to big-ticket items that require financing could see lower demand as shoppers also face higher borrowing costs.
Business owners should pressure test their operations now, while business is good, to ensure they can withstand a slow period, Tomic says.
“Make sure business is sound,” he says. “Are you producing at the lowest cost you possibly could? Are there inefficiencies you’re not dealing with because business is good but could pop up when under stress?”
How quickly will businesses feel the effects of a rate increase?
It depends on the amount and type of debt your business carries, said Daniel Milan, managing partner of Cornerstone Financial Services in Southfield, Michigan, via email.
Businesses with variable rate debt, such as business lines of credit or business credit cards, may have already seen rates rise as lenders anticipate the Fed’s next move.
Those with long-term, fixed-rate loans, such as a U.S. Small Business Administration loan or traditional term loan, are in better shape, Milan said. “They could be years out from seeing a major effect from a cash flow standpoint.”
The article 3 Ways Small-Business Owners Will Feel a Fed Rate Increase originally appeared on NerdWallet.