01/18/19

How Will Rising Interest Rates Affect Small Businesses in 2019?

One thing’s for sure—the Federal Reserve wasn’t shy about raising interest rates in 2018. President Trump isn’t thrilled with this, suggesting inflation has been reigned in and the increased rates will suppress corporate earnings and stock performance. This position is made more compelling with the news that the stock market is on pace for the worst December since 1931. And, yes, that was during the Great Depression.

However, more rates increases appear to be on the way. Peruse the minutes from the Federal Reserve’s Open Policy Meeting held back in September, and you’ll see the decision-makers feel that with low unemployment, strong spending, and other factors, gradual increases are appropriate.

How will this affect small business in 2019? Research shows higher interest rates are leading to more loan approvals from lenders. This increase is because the exceptionally low rates we’ve enjoyed in the past decade have resulted in leaner profit margins for lenders. Any increase to the rate gives them a bit of breathing room, which can help prompt them to open their wallets a little more generously.

So it’s not surprising that small banks are approving 49.9% of requests, which is the highest percentage since 2014. As for the larger banks, they’re approving 26.7% of requests. And while that rate may not seem sky-high to those outside the financial industry, it’s still quite impressive.

Another aspect of the rising rates is that savings rates will finally begin to make a positive impact. If you have savings accounts or CDs, this is good news. As Greg McBride, chief economist for Bankrate.com, puts it, “Savers are finally getting their day in the sun.”

The trade-off to the higher loan approvals and savings rates is that capital will cost more. These increased rates will be joined by other rising costs, such as labor costs and the impact of international tariffs. So if you’re planning on applying for financing in 2019, you should probably do it as early as possible, when the rising rates and other factors will have the least impact.

Even with the headwinds mentioned above, entrepreneurial optimism is booming. When the National Federation of Independent Business (NFIB) got their latest Small Business Optimism Index results back, they found optimism was the highest it’s ever been in the 45-year history of the survey.

These positive thoughts reported by entrepreneurs are largely due to factors  like strong consumer spending, favorable tax cuts, and deregulation. And investment, hiring, and sales have stayed strong thanks to the stable economy.

The natural reaction to exciting news like this is to throw a little party. Then, once the proverbial streamers have been cleaned up, most small business owners automatically look to the future. So it’s no coincidence the Small Business Optimism Index also revealed the number of business owners who planned to grow their businesses had also reached record levels.

As history has shown again and again, growth plans quite often lead to actual growth. And optimism breeds more optimism. The bottom line is that despite its potential challenges, 2019 should be a solid year across the board for small businesses.

Get more small business tips from Lendio.

About the author

Grant Olsen
Grant Olsen
Grant Olsen is a writer specializing in small business loans, leadership skills, and growth strategies. He is a contributing writer for KSL 5 TV, where his articles have generated more than 6 million page views, and has been featured on FitSmallBusiness.com and ModernHealthcare.com. Grant is also the author of the book "Rhino Trouble." He has a B.A. in English from Brigham Young University.

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