Tag Archive for: interest rates

interest rates, small business, lending, bank loan, Ben Johnston, Kapitus

How Will Rising Rates Impact Small Business Lending?

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The Federal Reserve Bank has raised the overnight rate four times so far in 2022 to try to tame runaway inflation, with more hikes likely coming. This leaves Main Street businesses that rely on financing in a major bind – rising rates mean small business loans have become far more expensive than they were just a year ago, and that added expense creates yet another challenge for those that have already faced rising costs, a demand for higher wages and supply chain shortages, among other things.

So now that we’ve been forced to live with higher interest rates for the time being, what should small businesses do? Should small businesses hold off on plans to take out loans until interest rates come back down? What if you need financing now, despite the current interest rate environment? 

Ben Johnston, Kapitus, rising interest rates, lending, small businesses

“Better credit quality small businesses can expect to see lower increases in rates while businesses with lower credit quality can expect to see a more dramatic increase in rates,” says Ben Johnston. Kapitus’ chief operating officer.

Ben Johnston, the Chief Operating Officer at Kapitus, tries to decode this situation by offering valuable advice for small businesses during these difficult times. 

Borrow for the Right Reasons

With the cost of capital being especially high right now, small businesses may want to hold off on borrowing if they can afford to. Interest rates often swing wildly from year-to-year, and once the current inflationary environment begins to settle down, the Federal Reserve may start to loosen its belt once again, so it may be worth waiting until then to apply for financing. 

If you need to borrow money now, however, it’s now more important than ever to make sure you are using the proceeds of that loan to invest in a project or aspect of your business that will increase your profits. These can include growing your business with new hires or expanded inventory, or the development of a new product that is projected to increase your revenue. The increased revenue should offset higher costs of capital and will enable you to comfortably pay back the loan.

“Small businesses should always weigh the cost of the capital that they are seeking with the expected economic return of the project they are financing,” said Johnston. “If the project provides sufficient returns at the cost of capital being offered, then they should move forward with the project. Unfortunately, as interest rates rise the number of economically viable projects declines, meaning that many small businesses will choose to hold off on financing growth until rates either come down or revenue and expense prospects improve.”

Fix Your Credit Score

Despite the fact that the prime rate is now far higher than it was a year ago, one fundamental rule of

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Fixing your business’ credit score is especially important in a high interest rate environment.

lending still applies: the higher your credit score, the less you will have to pay in interest rates. As the COVID-19 pandemic winds down, however, many small businesses may have taken hits to their credit scores given the COVID-related recession the US endured in 2020 and 2021. 

“Most lending companies are seeing their own cost of capital increase, and over time, this rise in interest rates can be expected to be passed on to small business customers in the form of higher rates as well,” said Johnston. “Better credit quality small businesses can expect to see lower increases in rates while businesses with lower credit quality can expect to see a more dramatic increase in rates.”

If you struggled during the pandemic and your FICO score decreased as a result, don’t worry – fixing it may not be as daunting of a task as you may think. There are some basic steps you can take to possibly improve it:

  • Talk to your creditors. If you have any outstanding debt, it’s worth contacting your creditors to see if you can modify your payment structures. Remember, creditors would much rather negotiate a new payment arrangement with their borrowers than have to send the debt to collections. Once a new arrangement is agreed upon, you can comfortably make payments without having any late payments show up on your credit score.
  • Pay off or lower your revolving debt. If you can afford to, make sure your debt on your line of credit or business credit card is 25% to 30% of your spending limit, as that is the credit utilization level that credit agencies prefer to see. Not only will this reduce your interest rate payments, it also lets potential lenders know that you can properly manage your debt.
  • Encourage your suppliers to give you trade references. Having a strong payment history with your suppliers will not be reflected on your credit report. However, your suppliers can give you a trade reference: a verbal or written notice to credit reporting agencies such as Dunn & Bradstreet, Experian Business or Equifax stating that you’ve always made payments on time. These positive references may increase your score and will be looked upon favorably by potential lenders. 
  • Try to increase your credit limits. If you have a line of credit or a business credit card, increasing your limits on them can increase your credit utilization ratio and help boost your FICO score. 

Consider Alternative Lenders

Higher costs of capital means that traditional banks will have to take on more risk when they lend to small businesses. As a result, many banks will have stricter requirements for small businesses seeking financing, thus making it harder for Main Street businesses to qualify for loans. This may make alternative lenders – non-bank lenders such as Kapitus – more attractive. 

Alternative lenders often require less paperwork and fewer requirements than banks for small businesses seeking financing. Plus, interest rate hikes often don’t affect the cost of capital from alternative lenders as much as they do traditional banks. 

“Banks too are seeing the effect of higher interest rates on their cost of capital and all lenders are looking warily at the economic uncertainty in today’s economy,” said Johnston. “Given this uncertainty, we can expect banks to reduce their exposure to small business loans in the coming months, and to continue to increase the cost of capital offered to small businesses. This means that Kapitus and other non-bank small business lenders will play an even more important role in providing small businesses with the capital they need to grow and weather uncertainty in this challenging economic time.” 

Johnston added that he “absolutely” expects that alternative lenders will be more attractive in the small business loan market than traditional banks. “I expect that non-bank small businesses lenders will be slower to raise rates to strong credit quality customers and will be less likely to tighten their credit boxes significantly, making small business lenders a critical source of capital in the coming months.”

Be Prudent

It’s no secret that we are living in uncertain economic times. Small business owners that rely on financing would be wise to shop around for the best rates, lower their revolving debt and seek financing products, such as SBA and term loans, that typically offer the lowest costs of capital. As the country is officially in a recession, small businesses should seek ways to tighten their spending and maximize profits. 

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How to Handle Another Painful Rate Hike

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More bad news for small business owners – for the fifth time since March, the Federal Reserve Board has hiked the overnight rate, this time by 75 basis points (0.75%) as part of a year-long effort to tame inflation. 

The latest hike will further drive up the cost of capital on most loan products, especially those being offered by traditional banks, and cause more pain for small business owners that have had to rely on financing this year in the wake of skyrocketing inflation, supply chain disruptions and rising worker salaries.

How Painful is the Hike?

Rising interest rates Kapitus small business lending

Fed Chair Jerome Powell announces yet another painful rate hike to tame inflation.

Small businesses that rely on financing have already bore the brunt of several rate hikes this year, and the latest rate hike will further raise the cost of capital for both fixed- and variable-rate loan products. The first pain point will be felt by small businesses that already have variable rate financing tools in place, since a hike to the overnight rate means that the prime rate – the interest rate commercial banks charge their most credit-worthy borrowers – will once again rise. 

The prime rate, which is used as a base rate for variable rate financing products such as business lines of credit, which often charge the prime rate plus several percentage points as the cost of capital, will rise once again. Since March, the prime rate has risen from 2.75% to 5.5%, and after this hike, could rise to 6.25%. 

What are the Current Loan Interest Rates as of September 2022?

It’s impossible to tell how high interest rates will go on specific lending products, since the rates charged greatly depend on the creditworthiness and other factors of the borrower. It is fair to assume, however, that the cost of capital for fixed-rate lending products, such as term loans – especially those being offered by traditional banks – will continue to rise. One measure to examine are the rates on the most popular small business loans out there, the SBA 7(a) loan. 

The 7(a) loan is a term loan offered through partner banks to small businesses with generally excellent credit history and at least two years in business. At the end of 2021, when the prime rate was just 3.25%, the maximum interest rate on a 7(a) loan of $25,000 or less with 7-year term or less was 7.5% (assuming the borrower has excellent credit). 

As of the end of August 2022, with the prime rate being 5.5%, the same loan carries a 9.75% rate. For a loan of $50,000 or more with the same term, the rate was 5.5% at the end of 2021, and in August 2022, it was 7.75%.

What can Small Businesses do?

No matter how you slice it, small businesses are going to have to pay higher rates now than they would have at the beginning of the year for most types of financing. If you already have a variable-rate loan, such as a business line of credit, the first thing you want to avoid right now is drawing down that line of credit since you will have to pay a higher interest on any money borrowed. 

Try to Renegotiate

One action to consider is attempting to renegotiate the terms of your loan with the lender, especially if

rising interest rates Kapitus small business lending

Rising interest rates may force small business owners to renegotiate terms with their lenders.

rising rates will affect your ability to pay back borrowed money. 

Remember, if you declare bankruptcy, it will be a long and costly process for the lender to recover any borrowed assets from you, so that’s an option they generally want to avoid and therefore, they will most likely be willing to work with you on a realistic plan to modify your loan. One thing that you can use as a negotiating tactic: if your credit score has improved since you opened the line of credit, you can use that to try and notch a lower interest rate.

Be Selective

If your small business needs financing during this period of rising rates, try to select the lending product that generally offers the lowest interest rate: an SBA loan. While interest rates have risen for SBA loans, they still generally offer the best interest rates and most flexible terms. The downside is that in order to obtain an SBA loan, you usually must have an excellent FICO score as well as a strong cash flow and several years in business, among other qualifications.

If you are seeking a business line of credit, you may even offer to put up collateral even if you have an excellent credit history, as secured lines of credit typically offer lower interest rates since the lender is taking on less risk. Additionally, term loans are typically cheaper than other types of financing, such as merchant cash advances and equipment financing.

Consider Alternative Lenders

An alternative lender, such as Kapitus, may be a good solution for you if you are seeking financing. Alternative lenders typically offer faster approval with fewer requirements and paperwork, and many have upgraded their customer service over the years to offer personalized service. 

Additionally, higher interest rates mean that traditional banks will be tightening their lending standards and make it more difficult for small businesses to obtain a loan, so alternative lenders may be a more appealing option if you’re seeking financing since they typically have less stringent requirements for potential borrowers.

Remain Steadfast

While now is not a great time to seek financing, just remember: interest rates rise and fall over time, depending on economic conditions. The Fed is hiking the overnight rate to combat inflation, so the high interest rate environment won’t last forever. If you must seek financing, try to go with the products that offer the lowest costs of capital possible, and consider looking at lending marketplaces to make lenders compete for your business. 

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Does Your Website Make You Susceptible to an ADA Lawsuit?

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Most small business owners know that their physical stores or offices must be compliant with the Americans with Disabilities Act of 1990 (after all, they’ve had more than 30 years to learn and comply with the law), but did you know that despite your efforts, you may still be susceptible to an ADA lawsuit? 

That’s because the ADA itself obviously predates the advent of the internet, and therefore no one is really sure how much legal liability risk you’re carrying as it relates to your website..

Gil vs. Winn Dixie

When the 11th Circuit Appellate court ruled in April that the ADA does not entirely apply to websites in

the Gil v. Winn Dixie case, it gave some short-term clarity on the issue. However, while the court ruled in favor of the business, the case generally put a renewed spotlight on the ambiguous subject of whether business websites should be required to accommodate people with physical and mental impairments. 

In Gil v Winn Dixie, a customer sued the grocery chain because its website did not accommodate visually impaired people, and therefore treated disabled people as “second class shoppers,” according to the plaintiff’s affidavit. In short, the plaintiff, Mr. Gil, claimed that he was given less preferable treatment than non-disabled customers. 

The 11th Circuit court, which covers Alabama, Georgia and Florida, ultimately ruled that Winn Dixie’s website did not fall under “places of public accommodation” under Title III of the law, and therefore its website is not required to be accessible to impaired or disabled people, even though its brick-and-mortar stores do need to be ADA compliant. 

Jury Still Out, Despite Decision

It’s important to note, however, that the judges’ decision in the case was somewhat narrow in its scope. Although they ruled in Winn Dixie’s favor, they did so largely because the company’s website is not a point-of-sale. The judges noted in their decision that there was nothing to prevent Mr. Gil from making transactions at any of Winn Dixie’s physical stores, which are ADA compliant. 

Legal experts have pointed out that if the website were a point-of-sale and disabled people could not conduct transactions on it (i.e., the customer had to renew and pay for a prescription on its site), the decision may have been different. So if your business has a website in which customers can make purchases, you may still face legal liability risk if your site is inaccessible.

Why the Case Matters

In recent years, website accessibility lawsuits have skyrocketed as the legal community continues to wrestle with the issue of whether websites should be ADA compliant. 

According to a study from UsableNet, the number of ADA-related digital lawsuits climbed to 3,550 in the US in 2020, up from 2,314 in 2018. Gil v Winn Dixie, however, was one of the few cases that made it to the Appellate Court, and while the court’s ruling ultimately favored businesses, it also puts a renewed spotlight on how companies – especially small businesses that may not be able to afford costly legal battles – should take steps to avoid sometimes-frivolous ADA lawsuits by making their websites accessible to people with disabilities. 

Last year, the 116th session of Congress ended up voting against the Online Accessibility Act which would have amended the ADA to include requirements to make websites accessible, but with a new Presidential administration and the fact that Senate Democrats now hold a slim majority, the issue could be taken up again shortly.

What are the Current Laws?

ADA requirements for physical stores and offices have been around for nearly three decades and are well-known, but – barring legislation from Congress – the question of how the ADA applies to websites is still murky.

In 2010, the US Dept. of Justice passed the Americans with Disabilities Act Standards for Accessible Design, mandating that electronic and information technology, such as websites, be accessible to those with disabilities such as the visually and hearing-impaired. The act does not, however, cite specific steps companies need to take to make their websites accessible. 

Today, many companies use the Worldwide Web Consortium’s (W3C) Web Content Accessibility Guidelines (WCAG) version 2.1 as a guide to making sure their sites are up to standard. While WCAG is not a legal document, W3C is an international community of web developers that is respected around the globe.

Avoiding an ADA lawsuit

While the issue is still ambiguous, if you’re a small business owner, it’s probably best to err on the side of caution when it comes to your website, lest you find yourself having to pay exorbitant legal fees in order to fend off a lawsuit. 

If you’re concerned about your website and are seeking to make it ADA compliant, you may wish to consult with an attorney. There are also plenty of software packages out there that can assist you in making sure your site is accessible to those with disabilities. 

Screen readers for your website can help you avoid a costly ADA lawsuit.

The first thing you may wish to do is invest in a screen reader for your site. A screen reader is a software program that allows blind or visually impaired individuals to read the text that is displayed on a computer screen via a speech synthesizer or a pad that will translate text on the screen into braille. Many of these software packages are available online and are free.

Following WCAG 

Additionally, your best bet is to carefully read WCAG 2.1 and make sure that your website follows its guidelines. You may wish to do this with an attorney. There are 4 basic principles to WCAG. A website must be:

  • Perceivable – Your website must be perceivable in terms of touch, sound, and sight. This is where a screen reader would most likely come in handy.
  • Operable – A user, regardless of their disability, must have ways to operate and browse your site. For instance, someone with motor difficulties should be able to use a keyboard instead of a mouse.
  • Understandable – Your website must use clear terms, simple instructions, and be able to explain complex issues.
  • Robust – Your website must use recognized standards, such as clean TML or CSS language so that users do not have to rely on additional technology besides their computer to use your website. 

Other Suggestions

Aside from the four principles stated, there are other actions to take to follow WCAG 2.1. On your site, you should make sure to:

  • Create alt tags for all images, video and audio files so that users with disabilities can read or hear alternative descriptions of your content.
  • Create transcripts for video and audio content so that hearing-impaired users can easily access your content.
  • Offer customers alternatives when they run into input errors. If a user is having difficulty navigating your site because of their disability, it is your responsibility to offer recommendations on other ways to navigate to the content they are looking for.

While making sure your website is accessible to all users will take time and energy, it is an exercise worth undertaking. First, it will enable you to avoid a costly lawsuit. Second, showing the world that you’re empathetic to people with disabilities, and making your site accessible will improve your public image. Third, it could even increase your customer base to include more people with disabilities.

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