Economy & Budget

Small business activity grows despite rate hike

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Yes, the Federal Reserve raised interest rates again. No, that’s not something that generally pleases small business owners, since higher rates mean traditional loans will grow more costly, potentially putting the brakes on expansion or investment. 

But the outlook isn’t as gloomy as it might seem. The increase of a quarter percentage point — from between 0.25-0.5 percent to between 0.5-0.75 percent — is only the second hike since rates were cut to nearly zero during the financial crisis. A year ago, a similar move didn’t faze small businesses, research shows. 

Further, the growth of web-based lenders has helped connect borrowers and lenders, using digital algorithms to assess creditworthiness, in days (rather than weeks). It has made the marketplace for small business loans more competitive, benefiting debtors. 

{mosads}The Fed’s willingness to boost rates reflects economic advances, such as a strengthening job market, that may push up sales, offsetting the cost of higher credit for businesses. Indeed, the unemployment rate reached a post-financial crisis low of 4.6 percent in November, according to the U.S. Bureau of Labor Statistics. 

“Monetary policy should avoid deliberately stoking the risks that come with overheating the U.S. economy,” Kansas City Federal Reserve President Esther George explained. Raising rates sooner, rather than later, she said, “reduces the potential for ‘go-stop’ types of policies that create volatility, rather than subdue it.” 

A continued decline in unemployment since a 25 basis-point hike in December 2015, coupled with a strengthening in the small business sector this year, bolsters that argument. 

In 2016, for the first time since the recovery from the Great Recession began, Main Street entrepreneurship activity reached higher levels than those recorded before the slump started, the Kauffman Foundation stated in its annual report on small U.S. businesses, published in November. 

The so-called survival rate that measures how many start-up businesses stay in operation for at least five years rose to a three-decade high of 48.7 percent, the Kauffman Foundation said. The rate had dropped as low as 42.9 percent in 2011. 

“U.S. small business activity has rebounded from the downturn and continues to gather strength,” Arnobio Morelix, a senior research analyst at the foundation, said in a statement. 

Small businesses—defined as firms with fewer than 50 workers —that have survived at least five years now represent 68 percent of all U.S. employers, the foundation reported, citing U.S. Census Bureau data. 

Such firms, which have complained that banks’ interest in accommodating them has waned since 2006, are increasingly turning to online lenders, according to a working paper by Karen Mills and Brayden McCarthy for the Harvard Business School. 

While the market was still relatively small in 2014, totaling about $10 billion, it had doubled in each previous year, the paper explained. In 2015, small business loans at the largest online lenders grew 58 percent from the year before, according to U.S. Treasury Department data. 

“The technology used by these alternative players is fundamentally changing many of the ways in which small businesses access capital, creating efficiencies, greater competition, price transparency, and even making small business lending more profitable,” Mills and McCarthy found. “The more competition that exists, the more likely small business customers will receive sympathetic consideration for their loan requests, favorable rates and terms and conditions, and better service.” 


Michael Jones is the Director of Content and Community Development at Bond Street.


The views expressed by contributors are their own and not the views of The Hill.


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