Last Wednesday (5/3/22), the Federal Reserve raised interest rates by a half percentage point, the largest rate increase since 2000. The Fed previously raised its rate a quarter percentage point in March. The Fed rate increases are meant to lower inflation while not slow down the economy so much that it tips into recession.
However, rising interest rates mean the cost of capital goes up. Increased interest rates mean higher payments for credit cardholders and new mortgages. The average interest rate for a 30-year fixed-rate mortgage rose to 5.55%, the highest it has been in more than a decade.
Small businesses will be impacted by the higher cost of capital. Short-term rates in particular will jump higher. Interest rates for business lines of credit and other variable-rate loans will increase making payments more expensive. This increased cost may cause businesses to halt recovery and growth.
Women-owned or Minority-owned Business Enterprises (WMBE) were polled by the Research, Policy, and Impact Center at the National Institute of Minority Economic Development about the potential impact of this rate increase.
Respondents indicated that there would be a ‘cooling off’ of business activities as a result of the increased cost of capital. More than half (58.1%) said they would delay planned business expansion and 54.8% said they would put off purchasing new equipment.
One small business owner said, “This rate increase will negatively affect our business throughout our production/supply chain ladder. As we are already battling supply shortages and paying higher prices for materials, this rate increase will only add to the struggle.”
Two-fifths (41.9%) of respondents would cut other business services causing ripples in the Business-to-Business (B2B) marketplace.
An WMBE explained, “As a small business, our line of credit is tied to the prime lending rate. The results of the increase will add to our operating costs which have already increased substantially due to inflation, the labor shortage therefore affecting our bottom line. There has been a heavy pattern of slow pay from general contractors to small business contractors over the last few years which will result in many small business subcontractors going out of business.”
This rate hike comes just as many WMBEs were beginning to recover from the economic fallout of the pandemic. During the pandemic, Governor Cooper established the Small Business Impact Grant Program (RETOOLNC) program to help certified Historically Underutilized Businesses (HUB) and Disadvantaged Business Enterprise (DBE) recover from unexpected adjustments to their business. Grants of up to $25,000 were awarded to certified small, underutilized businesses to help them with pivotal industry business changes needed during the pandemic.
One RETOOLNC recipient explains, “A rate increase will definitely be disastrous for minority and women owned small businesses. Especially when we are just beginning to see our business come back to normalcy. We did not have enough income last year to feed our families. It was thanks to loans and grants that we received that we could survive.”
Small businesses have been feeling the uptick in inflation. According to the Federal Reserve, inflation reached 6.6% last month, the highest point in four decades.
WMBEs, already struggling to remain profitable as fuel prices, supplies, and services costs increase, feel the coming rate hike will cause further uncertainty: “The surge in cost has affected me with travel due to rising fuel cost necessary to reach my customer, then the rise in cost for meals while on the road and meals necessary for PR with customers. Pricing jobs are very concerning because as a reseller, I cannot control rising cost for raw materials and shipping; these cost are controlled by my large business suppliers. A job that may take six months to a year to complete, will now most likely consist of an unforeseen price increase in materials. When this happens, it is usually a loss from the profit for the small business.”
The rate hike will also impact employees of WMBEs. More than a third (38.7%) of respondents to our poll indicated that they will be forced to reduce employee hours and 35.5% said they would not add new employees that were planned. Others said that they may have to postpone staff training (12.9%) and a few may even lay-off or furlough workers (9.7%).
Customers and clients of small businesses will also be impacted as they pass on the higher costs. Says one WMBE, “Any increases will have to be passed on to my customers and I’m not quite sure how receptive they will be to that news. It just makes everything increase. Costs of equipment, payroll increases, and we are still in the middle of supply chain issues that have a lot of my business in a holding pattern for equipment to complete jobs. So, profitability does not exist right now. The worst part of it all is I can’t predict when this will turn around.”
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