High interest rates squeeze small businesses’ bottom line

The cost of doing business has increased with rising interest rates, squeezing small businesses’ bottom lines. 

Amey Sgrignoli, president and CEO, Belco Community Credit Union, headquartered in Harrisburg, said small businesses are backing off from borrowing money and delaying purchases since interest rates have risen anywhere from three- to five percent for established small businesses and even more for new or at-risk entities. 

“This is holding some businesses back from growing,” Sgrignoli said. 

Mike Stoudt, small business partner and managing partner of RKL’s Allentown office, agreed, saying he is seeing a much longer lead time from businesses talking about capital improvements and making them. 

“When interest rates were low, they could buy what they needed,” Stoudt said. “Now they are slowing down.” 

Sgrignoli said small businesses she works with have also been faced with higher wages to keep or attract workers.  

“With all the increased costs, businesses are having to be careful and manage their business better,” she said. “HR practices and investments are not always [business owners] primary thoughts because they are the doers. It’s just a complex environment.” 

Stoudt agreed. “It’s unfortunate in this environment that companies can’t refinance, so they have to cut back in other areas like discretionary spending and staffing. The pie is only so big.” 

At the same time, businesses are finding they can’t raise prices in the current climate as many raised prices during COVID due to supply chain issues and workforce shortages, Stoudt said.  

“The consumer is weary now and not tolerating [price increases] so people who have done what they could with big jumps have to manage their costs,” he said. 

Sgrignoli said interest rates haven’t risen this fast or this much since the 1980s. Some companies have never experienced it, she added. 

“Small businesses that come to the credit union want us to chart a course to bridge the gap and get creative,” Sgrignoli said. “We start in modest ways and suggest they stay in line with the business they know, not venturing out too much.” 

The fixed costs are what eats at the bottom line and Sgrignoli said it’s difficult for some businesses to keep their margins good, especially with the cost of doing business increasing.  

Stoudt said when the Federal Reserve meets July 25, he thinks it will raise interest rates again.  

“Inflation has been tempered so we could be at the end of the increases,” he said. “We could see things start to turn around by the end of the year.” 

Sgrignoli said she thinks there is an economic slowdown, but not necessarily a recession.  

“It gives me hope that a soft landing is possible,” she said. 

Stoudt said one good thing for employers is that with the current climate, business owners have seen relief from some pressures like lower raise increases and supply costs.  

“There has been a bit of relief in the inflation area. I think that was the point of the increased interest rates and I think it worked –ish,” he said.  

Stoudt said he thinks small businesses should make sure their pricing is correct, balance interest rates with cutting back on discretionary spending for the rest of the year and defer capital purchases because that requires borrowing.