Small businesses are having to put off capital purchases as high interest rates hit them harder than bigger companies with greater access to funds, according to The Wall Street Journal.
In 2021, when interest rates were lower than they are now, larger businesses only paid 2% of their revenue on interest payments, while small businesses spent around 6%, which is projected to grow to about 7% by next year, according to the WSJ. The average interest rate has since risen for small businesses, increasing from 4.6% in August 2021 up to 9.8% in September, the highest since December 2006. (RELATED: Americans Are Increasingly Failing To Make Debt Payments As Inflation Continues To Put ‘Strain On Consumers’)
“It slows down our growth,” Tom Rauen, owner of 1-800-Tshirts, told the WSJ about the effect of interest rates on his business. “When the cost of capital was lower, it was a little easier to take on a bigger risk and bite off a little more.”
Of small businesses, more than half reported that the rising interest rates were affecting their business, while 19% predicted they would be impacted in the future, according to a survey conducted by the WSJ on 450 small businesses. Additionally, more than 20% of entrepreneurs said that the current tighter lending standards and the higher interest rates were hampering their hiring decisions.
200+ years of interest rates… pic.twitter.com/JPAF2KqMQg
— The Long View (@HayekAndKeynes) November 6, 2023
Interest rates are facing upward pressure from the Federal Reserve’s federal funds rate hikes, with the current rate being set to a range of 5.25% and 5.50%, the highest point in 22 years. The rate was raised to this level after 11 hikes that started in March 2022 to combat high inflation, which peaked at 9.1% in June 2022.
Following the rising rates, the dollar value for a small business loan dropped 16.8% year-over-year in the second quarter of 2023, indicating a weaker demand for loans coupled with tighter lending standards, according to the WSJ. Contributing to the decrease in demand, more than half of the 1,200 small businesses surveyed by Goldman Sachs said they couldn’t afford a loan at the present interest rates.
A September survey of small businesses found that 64% were concerned that the present economic conditions could force their businesses to close, while 35% said they were not concerned. High prices/inflation were listed by 48% of respondents in their top two concerns, followed by 31% who said the economy/client spending.
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