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Granted, any rate hike by the Federal Reserve is hardly welcome news for small companies, whose loan rates are often tied directly to the prime.
And it's true that rates on small commercial loans are up nearly a full point over the past half year. But if you were expecting to hear howls
of protest from fellow entrepreneurs, think again.
Only 4% of small companies surveyed by the National Federation of Independent Business last month view current rates as their biggest complaint,
even though they rose to 9.9% on average, up a tenth from the prior month. Why so complacent? For one, credit is still easy to obtain. More
telling, though, is that rates simply aren't that high on a historical basis.
Heresy? Not if you take a close look at Fed data on small commercial and industrial loans. frontier crunched the numbers and found that
if you compare loans made in the first-quarter this year with early 1997, rates have barely budged on small-business loans. They have inched up
only 0.28% on loans of less than $100,000 despite all the noise about sharply rising rates. The Fed's data, which is several weeks older than
the NFIB figures, pegged small-business loans at 9.65%, but that is only a quarter-point above the average rate since 1986 for such loans,
according to frontier's calculations. In fact, small borrowers are facing less onerous hikes than medium and large borrowers.
NARROWER SPREAD. Two reasons come to mind. First, rates actually took a sharp dip over the last three years, so much of the recent rate
rise was just making up for lost ground. Second, banks have been increasingly anxious to get your business, and they seem to be sacrificing some
profit to get it. Instead of passing along all of the rate rises, they have been cutting the spread between what they charge you for loans and
what they pay to acquire their money. In fact, the spread in the first quarter was hovering near the lowest levels of the past decade. That has
helped to keep rates under the double-digit level, though this is unlikely to last in light of the Fed's most recent 0.5% hike, bumping the fed
funds rate up to 6.5%.
Still, the May 16 rise may not bite right away. Only 36% of the NFIB respondents are borrowing regularly, a relatively low level. Both the NFIB
and the Fed's own surveys show tepid demand for loans, and alternatives like small-business credit cards still offer teaser rates below 6% for
up to six months. And lenders remain bullish on the sector despite the potential strain that a rate hike puts on entrepreneurs. Jeffrey Kiesel,
president of GE Small Business Solutions in Stamford (Conn.), says the rate boost isn't likely to cause a major pullback among smaller
companies, though they may start tightening up on their use of credit and give more scrutiny to the creditworthiness of their customers. Kiesel
expects the increase to work its way to small borrowers very quickly - and possibly come out the other end as price hikes. Indeed, the NFIB
report found a rising number of small companies are pushing through price hikes (more on that tomorrow.)
The upshot: If Alan Greenspan really wants to slow the 50%+ of the economy that small business represents, he may have to pump the brakes
even harder.
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