The Impact of Rising Interest Rates on America's Small and Growing Companies

What happens to the nation’s economy when the little engine that could starts to slow down?

We all know that small business is the engine of economic growth and job creation in this country, but when the cost of fuel goes up, the “little engine that could” slows down in many ways. Many small businesses across the country rely on term loans, project financing, operating lines of credit, and other commercial banking services to keep their enterprises afloat, especially during these volatile and unpredictable economic conditions. When the cost of borrowing goes up, it can have a major impact on a small company’s financial condition and stability, as well as its ability to grow and to be a source of new jobs and tax revenues.

The Federal Reserve has already raised interest rates by 50-basis points, and it looks like we will get another 50-basis point raise at the next meeting on June 14 and again on July 26. For large companies, these additional borrowing costs can be more easily absorbed and passed along to customers, but for smaller companies with razor-thin margins, this could easily be the difference between profitability and operating loss, between retirement savings (or not), between a family vacation (or not), between raises for employees (or not), between investments in training and education (or not), between new unit expansion (or not), etc.

Many pundits, experts and “Fed watchers” predict additional interest rate hikes even after the increases mentioned above are in effect if the battle of inflation rages on, and the hope is that these increases will not lead us down a path of economic recession, which would be particularly damaging to many small businesses that barely survived the Covid-19 pandemic and are still digging out of deep financial holes.  

Rising interest rates will also negatively impact the amount of capital investment in innovation that small companies can deploy, or worse yet, be forced to look towards more equity alternatives which is dilutive to their ownership, and in the long run is a much more expensive source of capital than debt, even in a rising interest rate environment.