with Federal Reserve’s Latest Rate Hike Add 0.5 percentage points to the cost of debt equity, Highest level in 15 yearsthe majority of SME loans will reach double-digit interest rate levels for the first time since 2007.
The cost of taking out loans and the cost of monthly interest payments on corporate debt have already risen sharply after a series of 75% mega rate hikes by the Fed, but the 10% level is a psychological threshold. and small business loan experts say it will be a burden. Many entrepreneurs have never experienced a loan market this high.
Small Business Administration lenders are limited to a maximum spread of 3% over the prime rate. With Wednesday’s rate hike raising prime to 7.5%, his most common SBA loan rate level will be above 10%. This is the highest prime rate since September 2007.
For seasoned small business lenders, it’s nothing new.
“Twenty-four years ago, in May 1998, when I started working in the SBA lending industry, prime was 8.25%,” said Chris Hurn, founder and CEO of small business lender Fountainhead. increase.
The loan he took at the time was a very common prime + 2.75% (then the maximum amount above prime a lender could charge on an SBA loan), or 11%. But that was the norm, not short-term volatility in interest rates.
“In less than a year, it’s going to double from the 5-6% range and have a tremendous psychological impact,” he said.
The monthly interest payments made by owners are not that different from what has become one of the main costs of the Fed’s rate hikes on Main Street. are forcing them to make much tougher decisions and sacrifice margins. However, there will be an additional psychological effect among potential new applicants. “I think it’s already started,” Hahn said. “Employers will be cautious about underwriting new debt next year,” he added.
“Every 50 basis points costs money and psychologically you can’t deny it. Many business owners have never seen double digits,” said co-founder and CEO of small business lending platform Biz2Credit. said Rohit Arora, “Psychology is as important as fact, and that could be a tipping point. I’ve had several people in the last few weeks say, ‘Wow, it’s going to be in the double digits.'”
A monthly NFIB survey of business owners released earlier this week found that the percentage of entrepreneurs who cited funding as their biggest business problem reached the highest level since December 2018. understood. Nearly a quarter of small business owners said they paid higher interest rates on their most recent loans, his highest since 2008. The majority of business owners (62%) have no interest in applying for a loan, he told NFIB.
“The pain is already there and it will get worse,” Arora said.
This is because the expectation is that the Fed will continue to raise rates for an extended period of time beyond the psychological threshold of breaking the 10% rate level. Even if rate hikes slow and could stop as early as next year, there are no signs the Fed will move to cut rates even if the economy is in recession. The latest CNBC Fed Survey shows that the market expects his Fed interest rate to peak around 5% in March 2023, and that rate will hold for nine months. He said the recession, which 61% of respondents expect next year, will not change their view of a “long term high”.
The problem is exacerbated by the fact that as the economy slows, borrowing needs will increase for business owners facing declining sales, and additional support from the Federal Reserve and federal government is unlikely. To do.
Lowering inflation from 9% to 7% is likely to be a faster change than lowering inflation from 7% to 4% or 3%, Arora said. “It will take a lot of time and cause more pain for everyone,” he said. Payments and low growth will continue, and even if inflation falls, it will not fall at a pace that offsets other costs,” he added.
As an Economist and Former Treasury Secretary Larry Summers recently pointed outthe economy may be moving into its first recession in 40 years, with interest rates and inflation rising.
“We are facing long-term problems,” Arora said. “This recession will not be as severe as she was in 2008, but we will not see a V-shaped recovery either. to stay in. For quite some time.”
Profit margins are already taking a hit as a result of rising monthly payment costs, which means more business owners will cut investments in their operations and expansion plans.
“Things are starting to slow down as we talk to small business owners who are looking for loans,” Hurn said.
With changing expectations for revenue and profit growth, there is a greater focus on cost reduction.
“It’s having the effect the Fed wants, but at the expense of the economy and the costs of these small businesses that don’t have enough capital,” he said. If you’re not feeling pain, you’re going to have more pain,” he said.
Margins are being hit as a result of monthly payment costs. Even with low interest rates, the majority of business owners covered by that debt during the pandemic have completed his one-year SBA EIDL loan forgiveness period, adding to their monthly payments. Business Debt Cost — Business investment is slowing and expansion plans are on hold.
Economic uncertainty will lead more business owners to borrow only for immediate working capital needs. Ultimately, even major capital spending will take a hit, from equipment to marketing to hiring. “Everybody expects 2023 to be a tough year,” Arora said.
Even in bad times, there’s always a need for debt capital, but whether it’s a new marketing plan or a new piece of equipment designed to make things more efficient or to scale, growth is at a premium. Reduce interest in oriented capital. Buying a company on the street. “There will continue to be demand for regular business loans,” Hahn said.
Business owners’ creditworthiness has not weakened overall, but banks will continue to tighten lending standards over the next year.small business loan approval rate According to the latest Biz2Credit Small Business Lending Index released this week, large bank lending fell to the second lowest total in 2022 (14.6%) in November. It also decreased at smaller banks (21.1%).
One factor that has yet to be fully tapped into the commercial lending market is the economic slowdown. This is not yet reflected in interim financial statements used by bank lenders to screen loan applications. Although the business environment was strong in the first half, full-year financial statements and tax returns from businesses reflect a weaker economy in the second half, and it is likely that many companies will not see year-over-year growth, so lenders are likely to would refuse more loans.
This means that demand for SBA loans remains strong compared to traditional bank loans. But based on current forecasts for Q2 2023, business loans could be at 11.5% or 12% by the time the Fed stops raising rates. There’s a history that I have,” Hahn said.
https://www.cnbc.com/2022/12/14/fed-rate-hike-pushes-business-loans-over-10percent-for-first-time-since-2007.html Federal Reserve rate hike pushes business loans above 10% for first time since 2007