With the Fed’s Lacker intimating there could be as many as four rate hikes this year, the already floundering small-business-economy could see an increase in SBA loan rates.
Why?
The U.S. Government sets a maximum interest rate for all of the loans it backs. That maximum rate is composed of a base rate + a variable rate, which is negotiated between funding institutions and the businesses, and generally sits between 5.75% and 8.25%, depending on loan term and amount.
The base rate, which is non-negotiable, can get one of three rates: the prime rate, the LIBOR rate, or an optional peg rate. The peg rate – generally less used in finance than the prime rate or LIBOR – is a weighted average of rates the federal government pays for loans with maturities similar to the average SBA loan.
While the Fed doesn’t set the prime rate, most banks base the prime rate on the federal funds rate, which the FOMC is responsible for. In fact the correlation is nearly perfect.
While generally this news wouldn’t be a cause for concern – as interest rates remain lower than they have in recent history – these statements come on the heels of the consistent negative outlook from the Philadelphia Fed Business Outlook Survey, which measures sentiment in manufacturers in parts of the Northeast corridor. Pair this with transition relief to the Obamacare employer mandate for small businesses ending, and SBAs are facing a 1-2 punch of a higher cost of capital and more capital outlays for employees, of which they are hiring fewer.
With an increase to the cost of capital on the horizon, a decrease in the availability of capital for spending, and lower employment numbers, the U.S.'s next President could walk into office with quite a bit on their plate with regards to the state of Small Businesses.