Interest rates and small business loans

As we move toward (or currently find ourselves in) a recession, everyone's keeping an eye on what decisions the Federal Reserve makes regarding benchmark interest rates. These have significant implications for the economy at large but also, more specifically, loans.

Borrowed money always needs to be repaid with interest, but just how much interest will affect whether small businesses can afford to take out a loan at all? What has the Fed decided to do? And, what impact will those developments have on small companies' ability to get and pay back loans? Let's find out:

Confirmed 2023 interest rates

As CNBC News reports, in mid-December 2022, the Federal Reserve set the Prime Rate — the figure that determines the interest rate for small business loans — at a whopping 7.5%. This marks the highest interest rate in 15 years. It also increased the benchmark interest rate by 15 basis points. This has pushed small business loan interest rates to over 10% with most sitting at 10.5%, firmly putting it in the double-digits.

Interest rates are the highest they've been in almost two decades.

Consequences for small business loans

Some small business loan experts say that the barrier presented by the increased interest rates will be more psychological than financial. For many business owners, it will be the first time they've ever had to contend with double-digit figures.

The threat these increases pose is still very real for a considerable number of small business owners. Considering the current financial crisis, they'll have to make difficult choices when it comes to financial resource distribution. Costs will also have to be cut elsewhere (such as inventory purchases, equipment and shipment) for the best chances at survival. As The Guardian explains, expansion or investment plans will have to be put on hold, presenting real dangers to their bottom line.

Consequently, many small businesses will have to forego taking out loans and find other ways to make ends meet or go into business rescue. In fact, according to a recent survey conducted by the National Federation of Independent Business (NFIB), over 60% of respondents (all entrepreneurs) say they're no longer even considering taking out a loan.

Even if the Fed slows rate hikes or rates plateau altogether, rate cuts aren't expected to happen any time soon, so loans will continue to be unaffordable for the foreseeable future. However, a declining economy means some small businesses will have no choice but to take out a loan to stay afloat with little to no support from the federal government, putting them between a rock and an extremely hard place.

If you need help deciding the best course of action for your small business, reach out to the Law Offices of Donald W. Hudspeth, P.C.

Categorised in: Arizona LLCs, Starting a Business in Arizona

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