The Federal Reserve chair, Jerome Powell, has been warning for some time that it takes time for interest rate rises to filter through to the real economy. Well, here we are.
Since March, 2022 the Fed has increased its federal funds rate – the rate it charges to its member banks to access money – from 0.25% to 5%. That’s a 20-fold increase in just a year. The Fed meets again this week – and may raise rates again.
When a cost goes up by that much in such a short time, it ultimately has an impact. And now not only have borrowing costs for investors and businesses exploded, but the unusually quick rise of interest rates has caused some banks to miscalculate their money management, all with consequences.
I’ve been seeing this all year at my clients. The prime rate is now at 8%, almost three times the level it was just a year ago. And this is the prime rate, which is used for the best and most credit-worthy of businesses. Few small businesses get that rate. Most are looking at rates between 9 and 12% on new or refinanced loans for working capital, equipment and property purchases. The high rates are causing many to rethink their inventory purchases, investments and hiring.
And that’s for existing businesses with employees, collateral and a financial history. Things are worse for startups and early-stage businesses. A new survey of more than 500 small and mid-sized businesses found that 76% of them only had enough cash to operate for 60 days. As traditional banks circle the wagons, many of these smaller firms are forced to look elsewhere for financing – such as online lenders – and at much higher costs.
The current situation is tough and getting tougher. But there are some options. I’ve been telling clients to seek out loans from the Small Business Administration, which can be used for many purposes, are offered generally at market rates, and are easier to come by from participating banks because they’re guaranteed by the federal government. And speaking of the federal government, there are also a large number of grants available for specific projects.
And, if you look around, there are many local and corporate initiatives that are offering financial help to small businesses.
In my state of Pennsylvania – like many other states – there are matching grants to help companies provide workforce training. More than $10bn is being made available in the form of grants, loans and equity investments by the federal government through its State Small Business Credit Initiative. Maryland is handing out more than a million bucks to local manufacturers. Connecticut is offering low-interest loans to its businesses. New Jersey is funding free marketing programs for small companies. San Francisco is offering $8,000 to open a pop-up. These are just a few examples.
Some corporations are also stepping up to help. American Express is handing out more than $2.3m to small businesses under its Backing Small Business grant program. Walmart has launched its own digital lending system to compete with banks. Apple is now paying higher than market interest rates to individuals and businesses who want to save with them. Verizon recently launched a new round of $500,000 in new funding for small businesses. New York City and Goldman Sachs have announced a $75m public-private low-interest loan fund, the largest in the city’s history.
Some money is available for those business owners that seek it. But this funding is competitive, time-consuming to apply for and difficult to receive. All of these problems trace back to the precipitous rise in interest rates over the past 12 months. And, as I wrote in December, it remains the biggest challenge small businesses face this year and looks certain to remain so.
