Next year will be a challenging year full of high interest rates for small businesses, but it won’t last forever.
- Interest rates rose considerably in 2022 and will hurt small businesses in 2023.
- In March 2022, the federal funds rate was 0.25% and is now 4.33%. The average prime rate at most banks has risen from 3.25% in March to 7% today, according to The Guardian.
- Small businesses tend to pay two to four points over the prime rate, so many companies are paying 9% to 11% on loans.
Why it’s news
There are around 32 million small businesses in the U.S., and in 2023 many of them will be hit hard with high interest rates among other issues.
Many businesses have been struggling the last few years with supply-chain issues, worker shortages, and an overall slow economy, but this year the main worry is high interest rates.
Businesses are being hit with interest rates that are nearly double what they were at the beginning of the year. The extra money could be paying for employees’ salaries, business equipment, repairs, and other necessary things, but instead is going straight to pay added interest on borrowed money.
The high rates will become too much for some businesses causing many to result in closing the doors. Many startups are also affected by this, as many lenders do not want to risk giving money, and the businesses cannot afford to get off the ground.
On the bright side—the high rates will not last forever. The reasoning behind the high rates is to help cool the high level of inflation in the U.S.
Rates will eventually lower again, but it will take time, and it is possible many small businesses won’t make it through the hard times.