This Article Reproduced with permission of NerdWallet.
The Federal Reserve raised interest rates by 0.25% on Wednesday, March 16, the first rate hike since 2018, and indicated it will gradually raise rates through 2022. Small business owners could feel the pinch of those rate hikes with more expensive loans, higher credit card costs and slower business growth as the Fed works to cool the economy.
While benchmark rates will remain relatively low (rates have been at or near 0% since March 2020), smaller businesses and startups in particular may feel pressured as rising costs of interest reduces profit margins that are already slim.
1. More expensive business loans, more loan 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 on existing business lines of credit and other variable-rate loans will rise every time the Fed raises rates, making payments more expensive.
The change won’t be drastic (a 0.25% rate increase is likely), but the additional cost may creep up for business owners as multiple rate increases are expected this year. If you have a variable rate loan, consider refinancing to a fixed rate loan to stabilize costs.
Do you need new funds? “Get it fast and at a fixed price [so] you can plan your spending,” says Aleksandar Tomic, an economist and associate dean at Boston College’s Woods School of Advanced Studies. “Even if [rates] are a little higher, you are protected against future increases”.
But be prepared, as banks can be even more selective, Tomic says, making it harder for companies to expand or invest in new equipment. Business owners can also shop online for lenders, which typically have higher rates but more lenient lending standards than traditional banks.
2. Credit card debt is getting more expensive
Credit card interest rates will be among the first to rise as long as the Federal Reserve raises rates, Tomic says. Higher rates translate into higher monthly payments for business owners who carry a balance on their business credit cards.
That could hit startups 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 finance the business, according to an August 2021 NerdWallet survey by The Harris Poll.
Pay off any outstanding credit card debt promptly, if possible. Otherwise, look for a balance transfer credit card with a long 0% APR window.
Check: Useful new features to look for if you want a better credit card
3. Business growth could stall
The Fed’s move is aimed at curbing inflation, essentially dampening demand (and thus prices) by making it more expensive to borrow money or buy on credit.
As a result, consumer spending is likely to cool off. Some industries will feel that more keenly than others. Businesses tied to big-ticket items that require financing could see lower demand as buyers also face higher borrowing costs.
Business owners should push to test their operations now, while business is doing well, to make sure they can weather a slow period, says Tomic.
“Make sure the business is solid,” he says. “Are you producing at the lowest possible cost? Are there inefficiencies you’re not dealing with because the business is good but might come up when you’re under stress?
Watch: The Fed got inflation seriously wrong, and now admits there’s no quick fix
How quickly will businesses feel the effects of a rate increase?
It depends on the amount and type of debt your company has, Daniel Milan, managing partner at Cornerstone Financial Services in Southfield, Michigan, said by email.
Companies 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.
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Those with long-term, fixed-rate loans, such as a US Small Business Administration loan or a traditional term loan, are in better shape, Milan said. “It could take years to see a significant effect from a cash flow standpoint.”
Kelsey Sheehy writes for NerdWallet. Email: [email protected]. Twitter: @KelseyLSheehy.
