Federal Interest Rates and the Impact They Have on Small Businesses
In March, The Federal Reserve raised the fed funds rate by 15 quarter-points. As of now, the overnight interbank borrowing rate will not have a huge impact on your small business. Still, it is another step in what seems to be a concerted effort to boost rates significantly higher.
Eventually, the cumulative effects of federal interest rate hikes will be felt across the American economy, and small businesses that adapt to the new reality now will be in better shape to accommodate higher interest rates.
In the short term, federal interest rate hikes signal confidence in the growth of the American economy. When executed perfectly, the Fed’s rate policies tame inflation without causing unemployment. But eventually, higher federal interest rates will make products and services more expensive, which on the margins will have a negative impact on consumers, the force driving the U.S. economy. The reason for this is that higher federal interest rates ripple almost immediately into higher interest rates on credit cards, followed by more expensive adjustable-rate mortgages (ARMs) and a larger national debt. CNBC estimates that the holder of a $200,000 ARM might see a $60-a-month increase. Conversely, savers usually have to wait months to see higher returns, as banks delay higher rates on savings accounts and CDs, allowing them to benefit by a larger spread between interest earned and paid.
It is widely believed that the Feds will raise rates two more times in 2017, in June and December. In addition, more rate hikes may come in 2018. Higher interest rates, in general, strengthen the U.S. dollar, which makes our exports more expensive in terms of local currencies. This hinders businesses who sell their products abroad. On the other hand, importers benefit from a strong dollar.
Most small businesses use credit, as part of their working capital, to finance payroll as well as purchases of inventory, raw materials and subassemblies. Higher interest rates also make capital projects and leases more expensive.
Therefore, now is the perfect time for small businesses to receive lump sum cash advances and loans to strengthen their operations and invest capital in long-term growth, while costs are still very affordable. Many small businesses turn to commercial business lenders and merchant lenders instead of banks, for a number of reasons, including:
- Speed: Banks demand tons of paperwork and are notoriously slow when it comes to approving loans, for both individuals and businesses. They typically require extensive underwriting that can take weeks before an application is approved or denied. A good commercial lender or provider of alternative financing requires much less paperwork, will approve your loan within 24 hours and deliver your cash in as little as two or three days.
- Credit score: Don’t be surprised if your bank takes a very narrow view of your creditworthiness. A low score effectively bars the door on bank loans. Commercial creditors have more leeway in assessing creditworthiness, such as tenure, gross sales volume, cash flow and bank balances. Furthermore, funding can be arranged as merchant cash advances based on a percentage of credit card receivables – technically, not a loan at all, and therefore not likely to depress your debt-to-equity ratio. Credit scores typically have little impact on the granting of merchant cash advances.
- Flexibility: Banks typically enforce a one-size-fits-all approach to business loans. A lender that specializes in small businesses will offer flexible rates and terms. This includes working with businesses to base repayment on sales volume. In addition, a commercial lender trusts small businesses to decide how best to deploy loan proceeds, whether it be to purchase inventory, pay taxes, open a new location, meet payroll, pay for renovations and expansion, or even to buy out a partner.
- Amounts: Due to the overhead costs of bureaucratic banks, minimum loan amounts often start at $1 million. A lean, mean commercial lending machine will offer small business loans or cash advances as low as $5,000.
The future is uncertain and predictions cannot be precise. While all signs point to higher federal fund rates, the political situation is unusually volatile this year, and no one can rule out events that might disrupt the economy and change current plans for additional rate hikes.