Finance: Rising interest rate impact on small business growth and economy

Melinda Rizzo, Contributing Writer//May 31, 2023


Finance: Rising interest rate impact on small business growth and economy

Melinda Rizzo, Contributing Writer//May 31, 2023

Will more expensive loans force area firms into slower growth patterns?   

Are higher interest rates, and a tighter lending landscape, causing small business owners to think twice before investing in their companies?  

A strategic approach to borrowing as well as considering “soft” ways to boost company culture and remain attractive to employees could be a way to bridge the higher price of business borrowing.  

According to a Business News Daily.com report, seven out of 10 businesses listed higher interest rates “…as a concern on their radar” this year.  

“What we’re seeing is some cautious optimism,” said Amey Sgrignoli, CEO of Belco Community Credit Union in Lancaster. Belco offers financial services in its central Pennsylvania offices in Adams, Cumberland, Dauphin, Lancaster, Lebanon, Perry and York counties. 

Sgrignoli said many short-term impact conversations with business owners and principals revolve around client borrowing and options to help them make strategic decisions to sustain their business models. 

That could mean “…pivoting or holding off [on additional spending] where it makes sense to do that,” she said. 

Current high inflation percentages and more frequent rate hikes “puts everything in turmoil,” she said. 

“We obviously need inflation to slow down and allow the interest rate environment to curtail and level things out,” Sgrignoli explained. 

Challenging interest rates 

More “normal” interest rates range from 2.5 to 4.5% range for businesses borrowers.  

“When you get north of that, it becomes more difficult to borrow and for businesses to grow,” she said. 

According to nerdwallet.com the May’s prime interest rate for small business lending is 8.25%. 

Michael Koch said for small business owners trying to fund day-to-day operations, rising interest rates on borrowing translates to higher capital costs.  

Koch is a valuation practice leader at RKL LLP in Spring Township, Berks County. RKL services clients in central and eastern Pennsylvania.  

“If they need to go out to fund inventory or expansion, it becomes more expensive to do that,” Koch said. 

During low interest rate cycles, business will have more ability to grow, expand or add a product line, he explained. 

“Borrowing money at a lower interest rate was a simple decision,” he said. 

With the cost of borrowing doubled in recent weeks, the cost/benefit process comes into sharper focus.  

“That is what people are focusing on more now. They are stepping back, questioning and doing more to analyze the cost of borrowing that money at this point in time,” Koch said. 

The costs 

As many small business owners may not have access to capital – or to leverage the cost of it the larger companies do, they have to look outside the traditional way to grow the business. 

Small businesses are impacted by inflation because their cost of doing business, buying raw materials, producing products and paying salaries are going up. 

“Combining these things can slow down the economy and is among the challenges of small business,” according to Koch. 

“One of the drivers of cost is their people. Inflation and rising wages obviously impact small businesses pretty significantly,” he said. 

Evaluate; improve company culture 

During challenging borrowing times, Koch said small business owners and managers can be more proactive about their company culture. 

“Having a good environment, and having happy and content employees in the workplace, is a good driver,” Koch explained.  

A coveted company culture can be very attractive to new employees and create motivation for established talent to stay. 

“When you get better at doing other things in your business, like valuing employees and their contributions, creating a healthy work culture, offering hybrid work environments and being flexible and supportive of employees work lives” you can support the business during tough economic times, Koch explained. 

“It’s not always about the highest wages,” he said. 

Inventory management 

Another way to help contain costs is created better inventory or product management systems. 

“There is a cost to get that inventory, raw materials, cost of goods and some companies do finance this piece. Making (inventory or product) and sitting on it is costly,” Koch said. 

He suggests tracking inventory more frequently, especially if the standard procedure is limited to an end of year reckoning. 

“Being mindful of how much inventory you have and taking a look at it on a more recurring basis – monthly or quarterly – helps reassess where you are,” and it can help control costs, he said. 

For firms using on-demand manufacturing to produce an order when the call – and cash or deposit – comes in, there can be less financial risk. 

“You’re not sitting on the inventory or producing product, storing it and waiting to sell it,” Koch explained. 

Consider going local 

Koch recommends businesses shop around and look for competitive loans and financing options when borrowing makes sense. 

“See what is available, shop and compare. With rising interest rates small businesses can’t change where they are or where they’re going, so they do need to reassess” money needs, he said. 

Sgrignoli said there’s a lot to be learned from the current financial landscape – for both business borrowers and consumers. 

Sgrignoli offers these tips:  

  • No shortcuts. Don’t take any shortcuts on risk mitigation. Plan for and expect change to happen. 
  • Always have a contingency plan. That means encouraging business and consumer saving strategies. 
  • Work locally. The current financial and interest rate increases reinforce the concept of thinking locally, according to Sgrignoli. 

“If you’re financial institution is in your community, they are providing jobs in the community,” she said. 

Other advantages to banking locally include easier “walk in” access to speak with banking professionals and relationship building over the long haul. 

As consumers and small business owners turned to local banks during the pandemic, higher interest rates and financial uneasiness has boosted the awareness and focus on community banks, credit unions and local financial institutions, according to Sgrignoli. 

She said those relationships are enduring. 

“When something difficult happens and you have a local banker to call, they are really a partner in navigating the storm,” Sgrignoli. 

Melinda Rizzo is a freelance writer