The US Federal Reserve announced today that it had raised a key interest rate by 0.25 percent, moving the federal interest rate target range from 0 to, 25 to, 50 percent. The federal interest rate is a benchmark interest rate that often affects other interest rates, such as the base rate. This is the first of many interest rate hikes expected in 2022 that will affect both consumers and small business owners.
Many small business owners have endured two years of brutality and continue to struggle with the long-standing challenges of pandemics, rising costs, supply chain’s troubles, and a cramped labor market. The rise in Fed interest rates may seem like another setback.
See how raising Fed interest rates can affect small business owners and the steps you can take to help your business cope with rising interest rates.
Why did the Federal Reserve raise interest rates?
Interest rates are close to zero since the pandemic and the Fed was reluctant to raise interest rates while the US economy continued to face the effects of the coronavirus pandemic. However, the economy is now facing significant inflation that affects both businesses and their customers. Interest rate hikes are designed to help slow inflation.
How much they will help remains to be seen, but this rate hike is only the beginning of the Fed’s efforts to curb inflation and protect the economy.
The impact of Fed interest rates on small businesses
Small business lending (excluding COVID relief loans) has recently begun to recover from the pandemic, with banks and other lenders reporting growing demand.
Business owners looking for financing in the coming months are unlikely to see much difference as they shop for financing. However, since corporate loans often involve larger loan amounts, they may observe the effect of higher interest rates faster than consumers who have loans with lower balances.
Business owners with outstanding loans may see interest rates rise, depending on the type of loan they have. See how it will affect some of the most popular types of business financing:
Credit lines: Variable interest rates are common on credit lines, which means that interest rates paid by businesses in this popular form of small business financing are likely to increase. This initial rate hike should have a small impact on borrowers with modest balances, but for those with large balances it and subsequent interest rate hikes can lead to significant increases in payments.
Business Credit Cards: Most credit cards have variable interest rates linked to the key interest rate, which in turn is influenced by the federal funds rate. This means that the rates will increase for the vast majority of credit card business owners. This initial interest rate increase is relatively small and the minimum payments for business owners are unlikely to be significantly affected. However, some businesses have significant credit card debt. And with rates likely to rise again, costs will rise. In addition, those who rely on 0% balance transfers or introductory offers may find that the percentage after the end of this offer is higher than expected.
SBA Loans: Borrowers who have benefited from COVID-19 (EIDL) low-cost loans due to financial injury will not be affected by this increase, as these loans have a fixed interest rate of 3.75% for the life of the loan. Other SBA loans, including loans in the popular 7 (a) program, offer both fixed and variable interest rates and the latter will be affected by future interest rate hikes.
Of course, business owners are also consumers and may find their personal wallets cramped as their consumer credit card rates rise or if they shop for mortgages or car loans.
How much are the rates expected to increase in 2022?
Fed officials say this is the first of many much-anticipated interest rate hikes in 2022 with six more interest rate hikes possible this year. Seven percentage point increases in interest rates would mean that by the end of the year, the federal interest rate target could be 1.75-2%. Additional interest rate hikes will make borrowing costs more expensive for many small business owners.
Future interest rate hikes will depend on many different factors, such as how long the US economy has struggled with high inflation, if another variant of the coronavirus causes future lockdowns, how long oil prices will remain high and even what happens. in the Russia / Ukraine war. As the Fed’s Economic Outlook notes, “As with real activity and inflation, the outlook for the future of the federal funds rate is subject to considerable uncertainty.”
It seems quite clear, however, that rates are likely to continue to rise this year and next, and business owners need to be prepared.
How can small businesses cope with rising interest rates?
There are several ways in which business owners can cope with rising interest rates:
- Get funding sooner rather than later. Some business owners were reluctant to borrow during the pandemic, and for good reason. However, waiting too long to secure funding can mean compromising on higher-cost funding or even potentially not qualifying. At the very least, business owners with no credit limit should consider securing it.
- Deal with credit card debt. Pay off high-interest credit card debt, if possible, or refinance it by transferring a low-interest credit card balance or even a time loan. Consider buying a low priced credit card.
- Floating rate refinancing loans. Consider refinancing a floating rate loan with a fixed rate loan. Despite this increase in interest rates, interest rates overall remain attractive to many types of commercial financing. Now may be the time to secure a loan with a fixed interest rate and predictable payments.
- Focus on financial health. Lower interest rates often go to financially sound borrowers. This includes those with good credit results (personal credit and / or business credit) and strong income that is substantiated by corporate banking statements. Strong credit and revenue 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 scores. They will be matched with lenders based on their unique data and qualifications. And they will receive unique information about the financial condition of their business to help them qualify for better financing in the future.
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