How Will The Current Rising Interest Rates Impact Your Small Business?

how rising interest rates and soaring inflation affect small business owners

With the pandemic and lockdowns in the rear-view mirror, small business owners and their bookkeepers alike were looking forward to a period of economic recovery. However, their resilience has been tested in the face of rising interest rates and soaring inflation. Policymakers opened Pandora’s box of sorts when they pumped the economy with stimulus. Now, they must undo the damage by raising interest rates faster and more furiously than anyone could have imagined. As a result, borrowing costs have climbed higher too. 

According to Chicago Fed President Charles Evans, more rate hikes will come in 2022 and 2023. He expects the Fed’s policy rate, which currently hovers between 2.25% and 2.5%, will reach up to 3.5% by year-end and climb as high as 4% by the end of next year. Even the best entrepreneurs and bookkeepers who help with financial statement preparation are probably wondering how the persistent rate increases will impact their business. This article will explore how rising rates have affected the small business community. 

If you were looking to expand your small business in 2022 and your bookkeeper was readying the books to borrow capital, you probably realized that money has quickly become more expensive as the year unfolded. Meanwhile, it is more difficult than ever for business owners to hold onto their capital due to rising inflation that has fueled higher prices for things like inventory, wages, building materials, and more. 

However, despite the headwinds, it’s not all doom and gloom. Many small business owners are finding a silver lining in the chaos of rising rates and sky-high inflation. For example, according to the National Federation of Independent Business (NFIB), an association of U.S. small businesses, entrepreneurs are hanging tough. Business optimism climbed higher by 0.4 points in July 2022 to a reading of close to 90. 

While it remains below the monthly average of 98, it is moving in the right direction and underscores the resilience of American business owners in the face of economic headwinds. 

Nevertheless, there is no denying the impact of the one-two punch of rising interest rates and higher inflation on the business community. One bakery business owner told The New York Times how her ingredient costs had soared as much as 50%, but customers have stubbornly refused any price increases on her baked goods items, causing her profits to take a hit. 

According to Forbes, interest rates have not risen to the point where small business bookkeepers cannot manage their debt payments. The 75 basis point hikes the Fed has been using have not crippled small business owners to the point that they can’t pay their bills. However, should the Fed become even more aggressive and raise rates by 250 basis points, business owners could struggle to pay the higher interest. The Forbes author suggests that business owners are being hurt more by rising labor costs and a talent shortage than higher interest rates. 

Small Business Capital Becoming Scarcer
However, that’s not to say that higher rates are not impacting businesses, especially minority-owned small businesses, where gaining access to capital can be more of a challenge. It is more difficult for minority borrowers, including women, to be approved for loans because they tend to be younger and lack established relationships with local banks. They also carry less credit history for lenders to assess their likelihood of repaying a loan. When they are approved, the interest rates attached to the loans are generally higher. 

Longer Term Outlook Good
The bottom line is that the era of cheap capital is now in the rearview mirror. Business owners looking to borrow money should be prepared to pay more for that capital than they did during the pandemic. Higher interest rates could bring some short-term pain to small businesses. However, the Federal Reserve is raising rates to fend off unwieldy inflation. If their strategy is successful, there will be an end to the Fed’s hawkish rate-raising, which should provide long-term gains to business owners, even if rates don’t return to the rock-bottom levels of the pandemic era.