The Federal Reserve’s steadily increasing interest rates may mean that loans are out of reach for many small businesses.
Key Details
- Companies with smaller payrolls and lower valuations have struggled more than larger companies to secure loans amid the rising interest rates.
- Rates for U.S. Small Business Administration loans have reached double digits, making it impossible for smaller companies to secure, The Wall Street Journal reports.
- In many cases, this means that young companies have to scale back plans for growth and instead focus on maintaining the status quo.
- Meanwhile, large, established companies like Facebook parent Meta Platforms issued bonds earlier this month and raised $8.5 billion.
Why it’s news
Larger companies often have the advantage over smaller ones due to significant financial backing, but the high interest rates have made this advantage even greater. Unlike large companies that may have access to capital, small businesses often rely on loans to expand and make new investments.
While larger corporations may have greater resources, small businesses have been responsible for much of the net job growth in the U.S. last year. But now, these smaller companies are starting to account for layoffs.
In March, companies with one to nine employees laid off 341,000 employees, according to the Job Opening And Labor Turnover Survey. That number was more than double the number of layoffs the month before and the highest number of releases since May 2020, The Wall Street Journal reports.
Most layoffs come from companies with 250 employees or fewer, accounting for 81% of all discharges in March. In March 2022, these companies accounted for 71% of layoffs, and 68% in March 2021.
Companies like Meta raise funds using capital markets or bonds, but small businesses primarily depend on bank loans. Every month this year, banks have issued fewer commercial and industrial loans to companies, The Wall Street Journal reports.
Half of all banks say they are raising their standards when lending to small businesses, and 56% said that demand for these loans has declined. In the first two weeks of March, commercial-bank lending fell by $105 billion.
Small business owners are beginning to worry about their ability to access capital, according to a Goldman Sachs report. In what the bank calls a “stunning shift,” 77% of respondents say they are worried about accessing capital compared to last year when 77% say they are confident in gaining access, The Wall Street Journal reports.
Small business owners also face higher operating costs as labor, supplies, and rent rise. Even if a small business can secure a loan, the high interest rate will make paying off that loan difficult, and the monthly payment will be another added pressure on the small business.
