Interest Rates Pressure Small and Mid-Sized Businesses

Consumer, Manufacturing, Small Business
  • Brian Hult

September 21, 2023

Federal Funds Interest Rate Rise Continues to Put Pressure on Small and Mid-Sized Businesses

A recent survey conducted by Alignable polled 7,396 randomly selected business owners from their online network of small-medium businesses, during the period of August 4 to September 18, 2023. They found that a majority (2/3) of business owners expressed that a decline of at least 300 bps would be required before anticipating business activity recovering to an appreciable level seen prior to the interest rate hikes by Jerome Powell.

Of the concerns noted affecting the decline in business was primarily the variable rate SBA (Small Business Administration) backed loans which have been drastically affected by the rate increase actions by the Federal Reserve over the period of Q1 2022 through to the current pause in rate increases (September 20, 2023).

 

FOMC Meeting Date
Rate Change (bps)
Federal Funds Rate
Sept 20, 2023+05.25% to 5.50%
July 26, 2023+255.25% to 5.50%
May 3, 2023+255.00% to 5.25%
March 22, 2023+254.75% to 5.00%
Feb 1, 2023+254.50% to 4.75%
Dec 14, 2022+504.25% to 4.50%
Nov 2, 2022+753.75% to 4.00%
Sept 21, 2022+753.00% to 3.25%
July 27, 2022+752.25% to 2.50%
June 16, 2022+751.50% to 1.75%
May 5, 2022+500.75% to 1.00%
March 17, 2022+250.25% to 0.50%

Forbes

 

Looking more closely at the responses in the Alignable survey it is easy to see a significant impact of the same Federal Reserve rate increases on the consumer borrowing for real estate, home inspectional services, and housing related industrial verticals. Other significantly impacted segments that stood out are Automotive, Transportation and Manufacturing, which is not a surprise given other recent news coverage of united automotive worker strike, and increased average fuel cost over the past few years (2021-2023).

Bloomberg - Alignable Data on Small Medium Business Interest Rate Impact

Bloomberg

Looking at these datapoints make it look grim everywhere from Main Street to Middle Market. BUT, what you have to consider is that these forces are pushing the market towards higher unemployment levels in order to tame inflation.

American retail spending through the end-of-year holidays is anticipated to be cut back for non-essential items. As a result, retailers and manufacturers will likely face additional challenges as the average consumer does not have any of the former stimulus money to spend unless they resort to larger scale credit use.

These signs in the market are of the businesses which are still persisting through challenging rate environment and other negative impacts. Alongside these businesses are the tombstones of those other businesses filing for bankruptcies. Companies that were subsisting on razor thin margins may be forced out with the interest rate hike unless they had sufficient working capital and ability to raise their own pricing with customers in order to weather the current economics. These otherwise healthy operating companies may be forced out of the market.

 

What this means for investors: opportunities are looming to help small and medium business owners who are facing the crunch in sales, supply, or overall shift in the financial landscape here in the US. Private sources of capital will be important in ensuring the future of these businesses that are the bedrock of the US Economy.

Are you an accredited investor and looking to place capital in the lower middle market, but don’t want the management headache of the day-to-day operations oversight? Book a call with us.

 

What this means for business owners: it is time to reach out to your suppliers, customers, communities, and make connections with sources of private capital to collaboratively chart the path through the coming fiscal quarters.

Do you own a business and need to discuss your current situation? Or considering how to exit for retirement over the coming years? Book a call with us.