Accessing capital in a high-interest rate environment

According to the U.S. Chamber of Commerce Quarterly Spotlight, two-thirds of small businesses say that rising interest rates are limiting their ability to access capital for their business. The survey also found that 62% of small businesses had to seek out additional financing in the past year due to rising prices, as inflation remains the top concern for many entrepreneurs.

As small businesses face both the rising costs of operating a business and a high interest rate environment, it is important that entrepreneurs are aware of the factors causing rates to rise, understand the impact on their business finances, and learn about financing tools, like the SBA 504 program, to access capital.

Factors impacting interest rates

Historically, the prime interest rate is the base rate that banks charge their best customers in the SBA lending landscape — borrowers viewed as the least likely to default.

The prime rate is determined by banks, but influenced by a variety of economic factors, including adjustments to the federal funds rate by the Federal Reserve. Recently, the Fed has increased the federal funds rate multiple times in response to inflation indicators tied to the pandemic.

When prime goes up, so do the interest rates on other products, including small businesses loans. In May of 2022, the prime rate was 4%. Over the past year, prime has doubled and reached 8% at the time of publication.

Know your numbers

In addition to capital being more expensive to access, business expenses across the board have increased. This includes the cost of materials, services, rent, utilities, and more. As the cost of doing business goes up, unless sales increase at the same pace, cash flow will be negatively impacted.

Before seeking additional capital to address a lack of cash flow, it is important for a small-business owner to update their business forecast to reflect both the change in operation costs, but also any reduced demand. This calculation is critical to understanding what type of loan, and for how much, is the right fit.

SBA 504 as a financing tool for fixed sssets

While interest rates continue to rise for lending options tied to the prime rate, the SBA 504 program offers an alternative public-private lending solution for small business owners to buy, expand or refinance major fixed assets like commercial real estate and heavy equipment.

The SBA 504 program has several borrower-friendly elements, including predictable payments and fixed 20 or 25-year terms. But perhaps the most attractive feature of the program is the below-market interest rate. A lower interest rate means more affordable monthly mortgage payments, freeing up capital to strengthen cash flow and reinvest in the business.

In addition to the borrower-friendly terms of the 504 loan, refinance clients can take cash out for eligible expenses, including inventory, non-owner salaries, rent, utilities and a business line of credit or business credit card debt. The refi is a great option for existing businesses to manage expenses when other costs are rising due to inflation and supply chain issues.

The dual pressures of inflation and high interest rates can make accessing capital difficult and expensive for small businesses. It is important that entrepreneurs know their current cash flow and an accurate forecast to understand their capacity to borrow and what potential financing products, like the SBA 504, are available to serve their needs.

• Eric Bacon is a SVP, Loan Officer at SomerCor.

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