Rates may rise, but don’t be too concerned – a small increase is unlikely to change major decisions on investment or hiring
With the appointment of a new Federal Reserve chair, the latest concern is that interest rates will go up in the next few months. That decision will depend on many factors, including inflation, jobs and the economy’s overall growth. But when that happens, watch out! The media will go nuts and the president will go ballistic. Everyone treats every Fed meeting as an economic earthquake. But for most small businesses, it isn’t.
A 25-basis-point increase doesn’t meaningfully change borrowing costs for most established businesses. In fact, it changes nothing at all.
But say the Fed increases the federal funds rate by that amount. The result would likely be an increase in the prime rate to 7%. Most of my clients – small businesses – don’t pay the “prime” rate because, well … they’re small businesses and are generally more risky investments.
So they often pay 1% or 2% over prime. Will this interest rate increase change their investment, borrowing and hiring decisions? No, it won’t. A business borrowing $500,000 from a bank for a five-year equipment loan, for example, would see their annual payments go up from $120,942 to $121,658.
Even if the bank’s prime rate jumped to 8.5%, their annual payment would only rise to $123,099. This is not enough of a difference to discourage my clients from moving forward with a financing project.
The reality is that capital markets – even for small businesses – are pretty stable right now.
Some may say that startups could be squeezed. But, like always, that depends on what kind of startup we’re talking about. If you’re in tech – particularly AI – money is falling from the sky. Venture capital funding, particularly to tech companies and anyone that mentions AI, skyrocketed 51% last year to a whopping $320bn. If – like most small businesses – you’re not a VC candidate, then you’ll find that banks are still interested in you too. The Small Business Administration has increased credit availability for many small businesses – particularly manufacturers – and is guaranteeing a significantly higher level of bank loans than in years past.
Small business loan approvals held firm at around 52% last year (up from 46% in 2021), according to the Federal Reserve. Financing firm Biz2Credit reported recently that debt repayment volume increased 24% and debt coverage improved from 0.57x in Q1 2025 to 1.40x in Q1 2026, “suggesting that stronger [small and medium-sized businesses] have demonstrated a greater capacity to manage their monthly obligations”.
What about consumers? Their spending is the main factor behind small business growth, and if they’re maxed out on credit that would reverberate across the economy.
Still, so far, so good. Consumer spending rose sharply last month to a rate significantly above inflation. Delinquency rates and bank charge-offs for delinquent balances on credit cards have both been falling each quarter since 2024. Consumer credit remained on “solid footing” in May, according to a widely watched credit scoring agency report, with the data suggesting that consumers have “largely adapted to a prolonged higher-rate environment despite rising household expenses and the return of student loan payments”.
This doesn’t mean that both businesses and consumers aren’t without their financing challenges. There are 34m small businesses and more than 360 million people that live here, so there’s bound to be a not insignificant percentage of people and companies that struggle to raise funds or pay their bills.
Jamie Dimon, CEO of JPMorgan Chase, the country’s largest bank, recently shared his concerns that the next credit cycle (a recurring economic response for when borrowers struggle to repay, defaults and losses rise, lenders tighten standards sharply, and credit becomes scarce) will hit likely harder than expected, pointing to $5.1tn in leveraged finance (private credit, high-yield bonds, syndicated loans) as the key stress point.
Too much of an interest rate increase could certainly trigger that. But your average plumbing company that borrows $500,000 for equipment isn’t going to be much concerned about whether to buy that machine based on a quarter-point rate increase. They decide based on whether they believe demand will justify the investment.
Another cause for concern is the rise in US bankruptcies. The American Bankruptcy Institute recently reported that small business bankruptcy filings “jumped” 67% this past quarter over last year thanks to “persistent inflation, elevated interest rates and geopolitical instability” and warned that the more “immediate constraint is access to credit” as some lenders are becoming more cautious in extending financing due the uncertainties that continue to challenge the US and global economies.
However, and like Dimon, both Brian Moynhian and Charles Scharf – who run Bank of America and Wells Fargo, respectively – are not yet raising red flags. In its latest earnings release, Moynihan said his bank “remains watchful of evolving risks” but so far has seen “healthy client activity, including solid consumer spending and stable asset quality, indicating a resilient American economy”.
Scharf reported similar findings, saying that “while markets have been volatile, we still see continued resiliency in the underlying economy and the financial health of the consumers and businesses we serve remains strong, though the impact of higher oil prices will likely take some time to materialize”.
So will the Fed increase interest rates? Maybe. But I wouldn’t be too concerned. For many established small businesses, a modest increase is unlikely to alter major investment or hiring decisions.
