With a new Federal Reserve chair appointed, concerns are growing that interest rates may rise in the coming months.
The decision will hinge on inflation, employment, and overall economic growth.
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When it happens, expect media frenzy and political backlash, but for most small businesses, it's not a seismic event.
A 25-basis-point increase does not meaningfully change borrowing costs for established businesses. If the Fed raises the federal funds rate, the prime rate could climb to 7%.
However, small businesses typically pay 1% to 2% above prime due to higher risk. Will this affect their investment, borrowing, or hiring?
Unlikely.
Consider a business borrowing $500,000 for a five-year equipment loan. Annual payments would rise from $120,942 to $121,658 with a quarter-point increase.
Even if the prime rate jumped to 8.5%, the annual payment would only reach $123,099.
Such a small difference won't deter most owners from pursuing financing projects.
Capital markets for small businesses remain stable. Startups may face some pressure, but it depends on the sector.
Tech companies, especially those in AI, are awash in venture capital—funding surged 51% last year to $320 billion.
For non-VC candidates, banks are still lending.
The Small Business Administration has increased credit availability, especially for manufacturers, and is guaranteeing more bank loans than in past years.
Small business loan approvals held at around 52% last year, up from 46% in 2021, according to the Federal Reserve.
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