With interest rates creeping to record-high levels from the second half of 2022 through the beginning of 2023, the cost of borrowing money has risen exponentially for most types of loans. We haven’t seen this pace of increases since the late ‘70s — right around the time today’s average small business owner was born!
These rising rates, along with inflation, may make it seem like an intimidating time to be in business for yourself. But getting the cash your business needs to thrive and expand is typically not out of reach.
Comparatively low interest rates, long terms, and a government guarantee continue to make SBA 7(a) loans a popular choice for small business owners. Funds may be used for working capital or existing debt refinancing and are typically a great way for business owners to save money or build their businesses.
However, it's important to remember that these loans do have variable interest rates, which means that monthly payments may fluctuate based on changes in the government rates.
Here's an update on interest rates and how they may impact your current SBA loan or one you’re interested in applying for in 2023.
2023 interest rate projections
The Federal Reserve has indicated that interest rates may continue to rise in 2023 to help combat inflation. However, experts predict that the pace of rate hikes will slow down in the latter half of the year as inflation begins to stabilize. That generally means your timing is important. Is financing your small business’ next step something you need to do now, or should you take a wait-and-see approach and potentially take advantage of lower rates later in the year? Keep in mind, nobody has a crystal ball.
Why are interest rates rising?
Raising interest rates is one of the primary tools the Federal Reserve uses to control inflation. When the economy is growing too fast, inflation may occur, and raising rates typically helps to slow the amount of money circulating through the economy, which may help to lower inflation. Conversely, when the economy is sluggish, the Federal Reserve may lower rates to encourage borrowing and spending.
So, the good news is that these rate increases typically mean the economy has been growing at a record pace. This is typically good for small businesses and means it’s generally a favorable time to invest in helping your company grow.
What are the signs of inflation?
The current U.S. Inflation Rate is 4.98%, compared to 6.04% in February 2023 and 8.54% a year ago. With falling inflation rates, the Federal Reserve may also slow its interest rate hikes, since they have worked to slow inflation.
Signs of inflation typically include: Lost purchasing power reflected by the decrease in how much consumers are able to buy with a given amount of money
- Higher interest rates
- Higher prices for everything like groceries, gas, consumer goods, etc.
- Economic growth slows
Inflation ebbs and flows through time. But there are outside factors that may have caused the inflation currently impacting the U.S., such as supply chain issues, the Russian/Ukrainian conflict, and negative Gross Domestic Product (GDP) periods.
Impact on SBA loans
While rate hikes may be a concern for borrowers, the impact on SBA loans is usually minimal. SBA loans are designed to be affordable, even with variable interest rates. For example, if the Fed Prime Rate were to increase by 0.25%, a $100,000 SBA loan payment would only increase by about $13 per month. That’s less than one hour of minimum wage in some states.
SBA loans are often considered to be the best option for many small business owners. The 10-year terms mean payments are typically manageable, the wide use of proceeds offers flexibility, and there is no prepayment penalty.
Are you ready for an SBA loan?
The right capital at the right time may help your business flourish, even in an uncertain economy. If you need working capital or want to refinance expensive debt, an SBA loan may be a great option.
SmartBiz® has helped more small business owners secure SBA loans than any other platform. We’ve streamlined the long, complicated application process. That means you save precious time during the application process. Check now whether you pre-qualify* for an SBA 7(a) loan.
Learn more about the popular SBA loan program on the SmartBiz blog.