In­creas­ing in­ter­est rates good news, bad news for small busi­nesses

Firms thrive in strong econ­omy, but bor­row­ing gets more costly

Albuquerque Journal - - BUSINESS - BY SARAH SKID­MORE SELL

It’s a good news-bad news sit­u­a­tion for small busi­nesses when in­ter­est rates rise.

The Fed­eral Re­serve says the econ­omy is do­ing well, so it has raised its key rates re­cently and is ex­pected to do so again in the near fu­ture. The strong econ­omy is great for most busi­nesses, but higher rates will likely in­crease what it costs for them to bor­row.

So what’s a small busi­ness owner to do? Un­der­stand how the sys­tem op­er­ates and con­sider the ways they can man­age.

Here are a few ba­sics to help:

The good news

Small busi­nesses thrive when the econ­omy is strong. Right now, the econ­omy is do­ing quite well, which is why the Fed is com­fort­able rais­ing rates.

The Fed­eral Re­serve, headed by Chair­man Jerome Pow­ell, doesn’t di­rectly con­trol the rates a busi­ness might pay on a credit card, line of credit or loan di­rectly, but these rates tend to move in the same di­rec­tion as the Fed’s bench­mark rate. When the Fed raises its bench­mark rate, it takes some time for that change to be re­flected in the bor­row­ing that busi­nesses do.

Jared Hecht, co-founder and CEO of Fun­dera — a mar­ket­place for small-busi­ness loans — said he has yet to see rates for small-busi­ness loans in­crease much, but he ex­pects they will soon.

The bad news

Ris­ing in­ter­est rates will likely in­crease costs for new small-busi­ness loans, ex­ist­ing vari­able-rate loans and credit cards. The ex­act rate a busi­ness will pay de­pends on the type of bor­row­ing and their credit pro­file. It is typ­i­cally prime rate, which is at 4.75, plus a few per­cent­age points based on how fa­vor­able the lender finds the bor­rower to be.

But any way you slice it, a higher in­ter­est rate means higher costs that will eat into cash flow and prof­itabil­ity. Plus, short-term loans to cover cash gaps, of­ten needed by small busi­nesses, may get more ex­pen­sive or dif­fi­cult to ac­quire, said Barry Cole­man, who helped de­velop the small busi­ness coun­sel­ing pro­gram at the Na­tional Foun­da­tion for Credit Coun­sel­ing.

What to do

Busi­nesses have a few op­tions in an en­vi­ron­ment of ris­ing in­ter­est rates, ex­perts say.

The sim­plest is to clean up your per­sonal and busi­ness credit. Credit scores are a key fac­tor when lenders de­cide whether to fund a small busi­ness. Make pay­ments on time, use credit only when ab­so­lutely nec­es­sary and keep your uti­liza­tion low. The bet­ter the credit score, the bet­ter the rates.

Next, think big pic­ture about your strate­gic plans. If there are ex­pan­sions or ma­jor in­vest­ments you need to make, con­sider the tim­ing in re­la­tion to rates and the econ­omy.

REX ARBOGAST/AS­SO­CI­ATED PRESS

Jerome Pow­ell, chair­man of the Fed­eral Re­serve, dis­cusses in­ter­est rates at the Eco­nomic Club of Chicago on April 6.

Newspapers in English

Newspapers from USA

© PressReader. All rights reserved.