The Fed is contemplating an interest rate hike as early as mid-year. While small business owners might be tempted to view this as bad news, higher rates can actually be a good thing for entrepreneurs searching for capital.
History has shown us that that rising rates positively impact commercial credit. Why? Because financial institutions are reacting to improved overall economy. The Fed only raises interest rates when economic conditions are strong.
While interest rates have been historically low for the past few years, a consequence has been that banks became stingy when it came to making loans. For example, according to the Biz2Credit Small Business Lending Index for February 2015, big banks ($10 billion+ in assets) approved 21.5% of funding requests, a high mark since my company began the monthly study of loan approval percentages in 2011. This means that nearly four-of-five applications are rejected by big banks.
Low interest rates translate into lower profits when banks make loans, and all too often this curtailed their incentive to grant funding requests made by small business owners. During the darkest days of the Great Recession, loan approval rates dropped below 10%, a result of banks' being very risk averse. Low interest rates did not help change the tide. Because loans to small businesses were often less than $2 million, what held them back is that the loans were not very profitable. In fact, big banks typically want to make "small business" loans in much greater amounts. Once it becomes more profitable for big banks to lend money, the spigots will open.
Economists have been predicting an interest rate hike for much of the past year. If you are a small business owner who has been planning to expand your enterprise, now is the time to begin the loan application process. Traditional bank loans take more time to close than higher cost alternative lending products. For the cost-conscious, my advice is to act immediately, especially if you have finished your 2014 income taxes. You will now have the important financial documents that a lender needs.
Moving quickly can impact your long-term future. If there are interest rate increases in successive years, you will lose the cost advantage that currently exists. Keeping the cost of capital low helps any business's profitability.