How Rising Interest Rates Affect SBA Loans
September 20, 2022 | Last Updated on: February 1, 2023
September 20, 2022 | Last Updated on: February 1, 2023
As the Fed raises interest rates, small business owners already fear for the worse, and rightfully so. These higher interest rates affect SBA loans and small businesses typically fare the worst. But there are solutions and precautions you can take to make your business thrive.
As of July, 27th, the Federal Reserve chairman Jerome Powell has risen interest rates up 0.75 basis points. The second consecutive rise, and putting the country’s interest rate at 2.50 percentage points. A huge hike when just a few years ago we had near-zero interest rates.
It seems that the world isn’t out of the hardships yet, and the Fed knows it. Although they’re doing everything to maintain the U.S. economy afloat, small business owners are rightfully concerned about the future of their small businesses.
With interest rates on the rise and record high inflation, as well as a looming recession on the horizon, as a small business owner, being concerned about the future of your small business is more than understandable.
But what does it mean for SBA loans? How will the U.S. Small Business Administration help small businesses during this time? Find everything you need to know about the impact interest rates will have on SBA Loans, as well as:
Keep reading and learn everything you need to know about the impact high-interest rates have on SBA loans, as well as some strategies to prepare your small business or plan your next step.
One of the biggest problems recently — and concerns for many economists, as well as small business owners — has been inflation. Although inflation is a phenomenon that happens through time (for example, $10 a hundred years ago would mean around $176 in today’s purchasing power), other factors are at play that took inflation to peak numbers.
As we came out of the pandemic and its economic hardships, supply chain issues and the Russian/Ukrainian conflict severely hurt the cost of essential goods and therefore, consumer spending power. Also, the U.S. economy has suffered two consecutive negative GDP periods, which puts the looming danger of a recession on the horizon in the eyes of economists.
To combat inflation, as well as to prevent a possible recession, the Federal Reserve raised the federal funds rate from 2-1/4 to 2-1/2 percent to maintain the economy as balanced as possible. With it, also trying to stabilize inflation at the 2% level in the future.
Small businesses are, by far, the ones that suffer the most during any economic downturn. During the pandemic, 400.000 small businesses declared closure during the first three months, representing around 2/3 of all closures.
With the current interest rate rises, small business owners have the most pessimistic look at the U.S. economy and the Fed’s response. Also, 85% of small business owners were concerned with inflation, as they worried about the Covid restrictions and lockdowns during its period — and rightfully so.
This comes to show that, unlike larger companies that can count on publicly traded stocks or other investment vehicles, small business owners can only depend on themselves to acquire business funding. But with the current spike in inflation, lenders and financial institutions tend to tighten their belts, making it much harder for small business owners to acquire funding.
As one of the most popular business loan options available for small business owners, SBA loans also tend to get significantly harder to apply during higher interest rate periods.
If you’ve acquired an SBA loan with fixed interest rates, you don’t need to worry, as it’ll remain with the same repayment terms you’ve applied with. Although, if you’ve acquired a loan with variable interest rates, you might find your loan payments change in the future. If possible, it’s a good idea to try and refinance your loan to more suitable terms.
If you haven’t acquired funding, although you might see a rise in the loan’s monthly payments, it’s still a good financing option with one of the best repayment terms and interest rates. They’re expected to rise, but an increase of around 0.5% in higher SBA loan amounts — like the SBA 7(a) or the SBA 504 — will make no significant impact on your repayment terms.
SBA loans will continue to have a significantly lower interest rate than other financing options. At the moment, the SBA 7 loan program has a variable interest rate of 7.75% to 10.25%, depending on the loan amount and repayment period. It’s still a very competitive rate, and if we see a rise of 0.5% — or even 1% — it will have little impact, especially if you apply for higher amounts.
As you’ve seen above, acquiring an SBA loan — even when the interest rate increases — is still one of the best types of funding with one of the best repayment terms available. Also, if you can acquire or have acquired a fixed-rate loan, it means that no matter how the interest rates change in the future, your repayment terms will not change. Even variable-rate loans will stay competitive with other small business financing options.
With the U.S. Small Business Administration backing your loan request, financial institutions will not pose many objections to your loan request. Even if you default on the loan, lenders will have the SBA corroborating the small business loan.
Although you can have one of the best types of funding during interest rate hikes, there are still a lot of factors you need to look at to acquire your small business loan. One of the biggest drawbacks of applying during an economic downturn is that your eligibility factor is a big concern for lenders.
You need to have a good credit score to apply for any type of SBA loan. It also helps if your small business has a healthy cash flow, and the SBA typically prefers already settled business with two years or more of practice, with polished bank statements.
Unfortunately, if you are a new business owner with a not-so-impressive cash flow or credit score, the likelihood of you acquiring an SBA loan during this period is very low.
With the U.S. Small Business Administration and financial institutions tightening their belts, an increase in the prime rate will only make it more challenging for small business owners to see their loan requests go through.
According to the Biz2Credit small business lending index, big banks keep passing fewer and fewer loans, only approving 15.1% of all loans, with a tendency to reduce due to the increasing interest rates.
But there are other types of business funding a small business owner can opt for. Here we look at more loan options available to you:
Business lines of credit allow business owners to receive a credit line in their business bank account — up to 250.000 — and only pay interest on what they use. It’s a great solution to cover everyday expenses like payroll, inventory, or any other short-term business need. It’s also an unsecured loan option, which requires no collateral and a fast funding option. You can sometimes get the line of credit on the same business day as requested.
The downside of this unsecured loan option is that’s also very expensive, with high repayment terms and interest rates — normally starting at 10%, but can go as high as 99%, sometimes with weekly repayments. If you opt for a line of credit, it’s a good idea to research various lenders and look for the best option.
Invoice factoring allows you to sell your clients’ unpaid invoices to a factoring company at a reduced price. The outstanding agency will grant you immediate access to the invoices’ value and move to collect payment from your clients. In the end, it will give you the invoices’ value minus a small fee.
If you need a speedy loan option or if you have unpaid invoices, this is a great and fast type of funding. It also guarantees you that the invoices will get paid, and they can also serve as collateral. Although it carries some heavy repayment terms as well, with an interest rate that can go from 10% to 79%.
Term loans and working capital loans aren’t only available through financial institutions or credit unions. You can opt for an alternative lender — like an online lender — and acquire business funding. These types of loans can be secured or unsecured — with many not even requiring collateral, although they might ask for a personal guarantee.
Although online lenders provide a fast and easy financing option without being overly concerned about your eligibility, it carries a higher interest rate than more traditional institutions. These interest rates can go from 8% to 10% or more in some cases.
As a business owner, it’s more than understandable to be concerned about the Fed’s rise in interest rates, as it can affect your small business tremendously. But your number one priority is, by far, the survivability of your small business! If you cannot wait or apply for an SBA loan, reach out to Biz2Credit, you’ll hear back from us within 24 hours, and if all goes well, you’ll get the capital on your business bank account within 72 hours.
Reach out to our team of small business funding experts and discuss not only the best funding option for your business but the best and smoothest repayment terms for you! Our goal is to help you with your goal of achieving success, and that will only be possible by offering the best loan option to you!