The Main Street economy is “dangerously near” the edge of the loan cliff as a result of the Federal Reserve’s ongoing interest rate hikes.

At the Federal Open Market Committee meeting, the Federal Reserve decided to raise interest rates by three-quarters of a percentage point, or 75 basis points, for the third time in a row. This move is intended to slow the economy and reduce inflation, but it is also placing small business owners nationwide in a lending bind they have not encountered since the 1990s.

Small company loans will increase to at least 9%, possibly higher, and this will force business owners to make a difficult set of decisions if the Federal Reserve’s FOMC future movements are consistent with the market’s estimate for two additional interest rate hikes before the end of the year. According to lenders, businesses are healthy today, particularly those in the recovering services sector, and credit performance is strong across the board for small businesses. However, given the Fed’s more aggressive stance against inflation, more business owners will be hesitant to take on additional debt for expansion.

The Main Street economy

The sticker shock of debt sticks out more even if a business’s cash flow is strong enough to cover the monthly repayment for many owners because they have only previously functioned in low-interest rate environments. However, more companies will also find it more difficult to balance their cash flow with monthly repayment during a period of rising inflation for all of their other business expenses, such as commodities, labour, and transportation.

The need for a loan hasn’t altered yet, but Chris Hurn, the founder and CEO of Fountainhead, which specialises in small business lending, said that the situation is perilously near to where people would begin to doubt.

He said, “We’re not there yet. But we’re nearer now.

Increasing Interest Cost

More business owners will resort to the SBA loan market, in which companies like Hurn’s specialise, as traditional banks and credit unions tighten lending requirements and companies start to violate debt covenants based on debt service coverage ratios — the amount of cash flow required to cover the debt.

“SBA lenders are one of the few locations to acquire company credit every time we get into one of these cycles when the economy is faltering and rates are going up,” he said.

The Fed’s rate actions, however, are causing business owners to pause even in the SBA market, according to Rohit Arora, co-founder and CEO of Biz2Credit, a company that also specialises in small business financing. According to Arora, “from a credit viewpoint, individuals are becoming more aware of rising interest costs and the Fed’s intention to maintain interest rates at 4-4.50%.”

Fed policymakers said on Wednesday that they plan to keep raising interest rates until the funds level reaches a “terminal rate,” or endpoint, of 4.6% in 2023.

They will now have to endure the discomfort for a longer period because, even a month ago, this was a “2022 occurrence,” according to Arora. He continued, “It’s a harder decision now that you don’t have the Fed ‘put’ behind you, where you could depend on adjustable loan rates not going higher.

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What did Fed policymakers say?

Fed policymakers said on Wednesday that they plan to keep raising interest rates until the funds level reaches a “terminal rate,” or endpoint, of 4.6% in 2023.

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