Interest Rates and Small Business Sentiment
Following a brief pause in June, the Federal Reserve raised interest rates by a quarter point in July. The Fed is closely monitoring the economy as the annual inflation rate hit 3% in June, striving to reach their 2% target. While the Fed acknowledged inflation is cooling, they’re leaving the door open to future hikes. Jerome Powell stated that the staff economists at the Fed have changed their outlook and no longer anticipate a recession in the second half of the year. With the benchmark rate at its highest in 22 years, financial experts continue to debate whether the United States economy will manage to pull off a soft landing and avoid recession. As interest rate hikes work to rein in inflation and slow the economy, one of the many effects is the rising cost of loans. The higher interest rates on loans have created a challenging environment for business owners and those seeking to purchase a business.
How Interest Rates Impact Small Business Owners
The BizBuySell quarterly Insight Report, a trusted economic indicator, recently conducted a survey of business owners to assess the present state of the U.S. small business economy. Main street business owners are facing a variety of macro-economic challenges, including continued labor issues, inflation, recession, and financing concerns. Business owners have mixed opinions about the Federal Reserve's attempts to control inflation. With 50.15% of business owners reporting a negative impact, 44.45% no impact, and a modest 5.39% sharing that they’re seeing a positive impact from recent rate hikes.
Small business owners report that the rising interest rates are having wide-ranging impacts on the bottom line. With increased borrowing costs, some owners are delaying plans to expand. From real estate transactions to equipment, financing and borrowing costs are rising, and changing growth trajectories. Business owners are also observing a change in spending habits among clients and customers due to the impact of higher credit card APRs on disposable income. Owners with variable rates on loans are feeling the squeeze and tailoring economic forecasts for the year ahead as a result.
Economic Sentiment Among Entrepreneurs
Over 60% of business owners and business buyers share a similar outlook on the economy, believing that it is slowing down. With the economy in flux, entrepreneurs are paying close attention to how inflation and interest rates are influencing their financial performance. Hiring issues, increasing costs, and more expensive financing continue to pose significant challenges for business owners across different industries.
For the last two quarters of 2023, business owners and entrepreneurs will be watching how the Federal Reserve manages interest rates as they aim for 2% inflation rates. While some entrepreneurs have faced financial setbacks, others have responded to the current climate by rethinking their financial strategies and finding new opportunities. Business owners and buyers can prepare for future challenges and succeed in a constantly changing market by understanding the impact of broader economic conditions on business value.