Even If The Prime Drops, Small Firms Will Suffer

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The average rate small businesses have to pay on loans could continue to rise even if the prime rate drops, a Purdue University professor says.

Because small businesses have faced high commercial interest rates for so long, they have exhausted cheaper funds from nonbusiness sources -- employees, friends, relatives, insurance policies, and consumer lending institutions -- says William C. Dunkelberg, who conducts quarterly polls of small businesses for the National Federation of Independent Business.

"Cheaper sources are drying up," Dunkelberg says, noting that in January of this year, 27% of the companies he surveyed that had borrowed money reported short term rates of 15% or lower, while in April only 18% reported rates that low. So even if the prime drops, Dunkelberg concludes, the average rate small businesses pay could stay high.