Rate hikes affect every business, and small companies do not stand a chance. You should watch this if we watch Federal Reserve increases rates for the first time in a long time.
To reduce inflation To curb inflation, to curb inflation, the Federal Reserve is increasing interest rates for the first time in 2023.
The higher interest rates could affect the cash flow of small-scale businesses and their capacity to take out loans or reinvest funds, as well as employ workers.
Seven out of ten small business owners are now discussing the effect the rising rates of interest will impact their businesses as a significant concern on their minds.
This post is intended for entrepreneurs with small businesses or finance professionals who want to learn more about how interest rate increases affect their companies and how they can prepare.
It is expected that the Federal Reserve is expected to raise interest rates as high as 6 times by 2022. It will begin in May. In the event of interest rates increasing at least six more times in the next 9 months, the once-insignificant issue for owners of small businesses has become a significant concern for financial planning.
In March 2019, the Federal Reserve increased interest rates for the first time since December and stated that it would likely keep raising rates throughout the year. The market is already making predictions about, for example, whether the Fed will announce two more significant rises in June and May, followed by three additional increases in the second quarter.
These rate increases are designed to slow the growth of inflation. It is currently at 7.9 percent, the highest rate for the U.S. since 1982. According to Aleksandar Tomic, an economist and associate dean of Boston College, the use of interest rate hikes to lower inflation causes many new difficulties for entrepreneurs with small businesses.
“Macro-level economic changes hit small businesses a little harder,” Tomic explained, partially due to small-scale businesses not having the same financial resources and flexibility that large companies do and are confronting several of the same challenges, including a long-standing workforce shortage as well as ongoing interruptions in the supply chain.
Recent research shows that small companies are looking forward to some financial fallout due to the anticipated interest rate increases. Based on the latest MetLife and the U.S. Chamber of Commerce Small Business Index, for example, 70 percent of owners of small businesses are now discussing the effect that rising interest rates could impact their business as something to be concerned about. Inflation, often seen along with the increase in interest rates, is their primary worry in general.
Additionally, the cumulative effect of the issues facing small-sized businesses has led owners to be dissatisfied with the general outlook of the economy. A mere 19% of small company owners believe that the economy is expected to return to pre-pandemic conditions within the second half of 2022, as per an earlier National Federation of Independent Businesses (NFIB) study, and the majority of small business owners aren’t expecting a complete return until 2020 at the latest.
“It’s not a fun environment for small businesses,” Tomic stated. “Things can get ugly very fast.”
Key Takeaway
The Federal Reserve expected to increase rates by six times in the coming year 70% of small-business owners say they’re worried about the effect of rising interest rates on the cash flow.
Below are some of the most critical questions for entrepreneurs with small businesses amid the Federal Reserve gradually rolling out interest rates.
Capacity to service the debt
The survey conducted by MetLife and Chamber found that 39% of small-business owners took out a business loan to pay for increased costs of products and equipment due to the rise in the inflation rate. However, they already see the effects of higher interest rates in their capacity to pay off and borrow loans: 6 percent of owners of small businesses who participated in the NFIB survey said they paid more for their latest loan. In this case, 2 percentage points over the beginning of January.
While it’s only an insignificant percentage, the requirement for steady and ongoing financing will result in more small companies looking for credit or other lines of credit. This could increase the costs to repay that debt, particularly when the interest rate isn’t fixed.
It is true, Tomic said, small firms should be cautious about drawing down credit lines or obtaining new loans if they can do so until there’s more clarity regarding the frequency and amount of rate increases. If a business requires the money, he advises that they secure a fixed rate that doesn’t fluctuate in line with the rate of interest increases by the Federal Reserve.
Did You Know?
In the 1970s, as the most recent major inflationary cycle began in the market, interest rates climbed to around 16%. That’s roughly half what they are now.
The worsening exacerbates worker shortages.
Since the beginning of this year, over the past two years, many millions of people have departed their jobs which has left small and large companies alike scrambling to fill job openings. If they remain there, it’s not unusual to find their earnings increasing by half or more than what they earn. Overall, wages and salaries were up 4.4 percent last year. This was the highest increase in the past 20 years. And they will likely increase further by 4% next year.
Zoltan Acs, director of the Center for Entrepreneurship and Public Policy at George Mason University, said the necessity to repay or fund loans could affect the capability of small companies, which are already hard hit due to wage inflation – to fill their employment requirements. “They may not be able to compete for workers on pay.”
Given the increasing pressure being placed on small companies by the Great Resignation, an increasingly competitive labor market and the inability to offer appealing compensation programs can lead to further problems with staffing. However, Acs noted that small companies don’t require a competitive advantage with other companies for talent because of pay alone. They could highlight their values, culture, and social and environmental impact to attract talent leaving more prominent companies due to their desire to do something different.
Tip
Please find out how you can improve the culture of your business, its purpose, and the social responsibility of the company as well as other tangibles. Employees increasingly seek to compete to be a top talent source with more giant corporations.
Capability to anticipate inventory needs
Small companies attempt to minimize the effects of inflation and disruptions to supply chains by carrying more stock. Inventory that has been accumulated acts as a hedge, locking the price before it increases.
The issue is when the savings get wiped out by having to move storage, distribute and transport that inventory since small-scale businesses do not have massive factories at many locations nationwide for their products to be stored.
“Balancing the costs of carrying extra inventory with the normal cost of doing business isn’t easy,” Tomic stated.
It’s particularly true for smaller companies, as increasing interest rates will further restrict their cash flow. After building stocks during the fourth quarter, small-business owners are beginning to draw back in the current year. Most of those who participated in the NFIB survey felt that stock levels of their inventory had become “too low.” However, in a sign of concern about the impact of interest rate hikes on affect cash flow, only two percent of owners plan to add stocks in the next few months.
In light of the constraints on the supply chain faced by businesses, Tomic advised small business owners to review their forecasting models and then adjust their plans to increase or cut the amount of inventory they have throughout the calendar year.
Slower growth
For small businesses that can survive the epidemic, this is the ideal moment to invest and grow to increase market share and strengthen their position in the market or, more effectively, if the rate and frequency of the increase in interest rates were more specific. Most small-sized businesses finance their expansion using a mix of debt and equity.
In a recent QuickBooks survey, for instance, entrepreneurs from small companies highlighted the necessity of “increased access to capital” for growth. According to ACS, businesses born from the epidemic (meaning that they are less than two years older) or new entrepreneurs looking to establish businesses are more vulnerable.
Acs recommended entrepreneurs and startups who require capital consider other financing options, including venture capital such as personal equity loans, private loans from relatives and friends, and personal savings. He also stated that “small businesses may have to curtail whatever growth plans they had for this year,” regardless of whether they are leasing out a brand new building, entering an entirely new market, or providing more goods or services.
What’s the next step for interest rates?
Interest rates remain relatively modest, even with at least two more hikes expected before the season is out. One of the questions experts try to determine is if the current inflationary climate can be a long-lasting systemic problem or is just the result of a temporary pressure point.
Acs stated that the policy is more of a shift in direction than an open plan to slow economic growth. However, this could shift depending on the pace of events if the evidence suggests that inflation is a systemic issue. The Fed may begin pushing rates as high as 4% and higher, which could undoubtedly sound an alarming economic alarm for smaller businesses.
