'Extremely sensitive' small businesses brace for Fed interest rate hikes

Consumer borrowing costs are headed higher as interest rate hikes are expected by the U.S. Federal Reserve starting on Wednesday.

Federal Reserve Chairman Jerome Powell is expected to announce a raise in the central bank's key interest rate from near zero to combat rising inflation – a hurdle faced by cash-strapped small businesses that have already been forced to take on heavy debt loads during the COVID-19 crisis.

“It's still the case today that a lot of entrepreneurs, small business owners use credit cards," Neil Bradley, Executive Vice President and Chief Policy Officer at the U.S. Chamber of Commerce, told Yahoo Finance Live (video above). "The credit card, all of us have in our pocket to fund their capital needs, their borrowing needs with respect to their business that makes them extremely sensitive to changes in interest rates."

Small business owners are generally expressing anxiety about the planned hikes, with the U.S. Chamber of Commerce finding that 70% expressed concern about rising interest rates.

Fed rate increases affect the rate of loans for things like homes, cars, and mortgages, meaning that consumers could soon tighten their belts and could have less disposable income to spend at neighborhood stores, bars, and restaurants.

"This is where we see one of the bigger differences between small and large businesses,” Bradley noted.

With inflation hitting record highs, large businesses have been planning for higher interest rates and factored that into their capital requirements and how they might meet their operational needs. For the smaller mom-and-pop business owner, there could be a challenging landscape ahead as they seek capital.

“It's still the case today that a lot of entrepreneurs, small business owners use credit cards," Bradley said. "The credit card, all of us have in our pocket to fund their capital needs, their borrowing needs with respect to their business that makes them extremely sensitive to changes in interest rates."

And while others who aren’t using the credit cards, “often use home equity lines of credit on their businesses, again, interest rate sensitive,” Bradley explained.

According to a recent QuickBooks survey of 2,000 businesses, small businesses need increased access to capital to grow, with 45% citing “rising costs” as the biggest threat to their business. Furthermore, businesses that have relied on loans to survive during the pandemic could feel another pinch as interest rates rise.

In light of the rate hikes amid rising inflation as the pandemic seemingly wanes, Small Business Administrator Isabella Guzman told Yahoo Finance that the agency will “continue to fortify our programs and make sure that we have strong lending networks that we can distribute our loans to and better meet businesses, where they are with products that fit their needs."

Dani Romero is a reporter for Yahoo Finance. Follow her on Twitter: @daniromerotv

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