What do Rising Interest Rates Mean for Small Business Growth?

The Federal Reserve raised the Fed Funds Rate to 2 percent in June, the second increase in 2018. Based on the strength of the economy, the Federal Reserve plans to raise the rate twice more this year. That means banks will raise their interest rates as well, so it will cost more for business owners to borrow money, according to the National Federation of Independent Business (NFIB).

NFIB shows borrowing isn’t a huge issue for most business owners at the moment. Only 5 percent of owners reported difficulty in obtaining loans. But, will that change when interest rates rise? Here’s what owners need to know, according to NFIB.

Small Business Owners Optimistic

Although borrowing money will be costlier as interest rates rise, 34 percent of business owners in the NFIB Small Business Economic Trends survey said the next three months would be a good time to expand. That’s on par with a high of 34 percent in May, and higher than every month between 2013 and 2016.

If it makes financial sense for a business, the best time to borrow may be now. Interest rates are still at historic lows for a strong economy, NFIB Chief Economist William Dunkelberg said, but he expects rates to be up at least a full point, possibly 1.25 points, by the end of 2019.

“A year or two ago, everyone wanted a variable rate. Now, people have been swapping into fixed rates,” Dunkelberg said. “That’s what big business is doing and that’s what small businesses should be doing, too.”

If you’re a business owner with an existing loan with a variable interest rate, you might want to consider getting a fixed rate instead as rates rise, according to NFIB. A fixed rate means the interest rate won’t change, either over the life of the loan or the loan term. Since the Federal Reserve has already indicated they plan to raise rates at least twice more in 2018, it makes sense to lock in the lower interest rate now.

As for borrowing new money, there are a couple of questions business owners need to ask themselves, Dunkelberg said: How expensive is the money? Or, how much am I going to make on what I invest?

If interest rates go too high, it’s not good for investment, Dunkelberg added. For example, if financing becomes too expensive, a small business owner may be less likely to purchase new equipment, buy more inventory, expand their business space, or hire more employees. All of those deferred expenditures slow the growth of the economy, he says. But the silver lining is that interest rates make banks more likely to give out more loans since higher rates makes more sense financially for the lenders.

New Policies, New Opportunities

Interest rates aren’t the only factor in business growth outlook. For example, the NFIB Small Business Optimism Index jumped from 11 percent in November 2016 to 23 percent in December 2016. The only major change? The election of President Donald Trump.

“Nobody knew what President Trump’s policies were going to be [prior to his inauguration], but it was a change in the management team, and it changed everybody’s views on what you could earn on an asset,” Dunkelberg said.

Although no one knew what was to come, most business owners believed business taxes and regulations would be cut, Dunkelberg said. Many economic forecasters believe the economy will peak in the second half of 2018, and it’s likely things will begin to slow down in 2019.

“It’s really hard to grow that fast forever,” Dunkelberg said. “Is the economy going to crash? No, I don’t think so, but we will slow down.”

For now, small business owners are feeling very optimistic about the economy. The NFIB’s Small Business Optimism Index was at an all-time high of 108.8 in August, rising to 0.8 points above the July 1983 record-high of 108.

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