Wall Street Dreads a Fed Rate Hike but Entrepreneurs Shouldn't Worry
The smallest businesses that most need financing rarely qualify for a standard bank loan. An uptick in interest rates doesn't change that.,
Opinions expressed by Entrepreneur contributors are their own.
It's widely expected that later this week the Federal Reserve will raise benchmark or base interest rates by a quarter-of-a-percentage point.
In 2008, the central bank took the unprecedented action of cutting the minimum rate that lenders charge for non-Treasury securities to zero in an effort to reverse the recession and drive economic growth.
While big business and Wall Street have loved the cheap investment capital, zero interest rates have had little impact on small business owners and entrepreneurs.
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That's according to Martin Mucci, president and CEO of Paychex, a leading provider of integrated human capital management solutions for payroll, HR, retirement and insurance services. The company also compiles and publishes the Paychex | IHS Small Business Jobs Index, which tracks monthly jobs investment and hiring of more than 350,000 employers with fewer than 50 employees respectively.
Mucci says that small businesses and entrepreneurs tend not to rely on traditional banks and lending institutions as their primary source for funding because start-ups rarely meet the financing and revenue requirements of lenders.
"Entrepreneurs typically rely on family, friends, home equity loans, private investment opportunities, online lending clubs or crowd-funding sources now. Those informal funding sources are unlikely to be impacted by a 25-basis point increase in interest rates," said Mucci.
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"I don't think the Fed's proposed rate increase is going to have much of an impact at all on new business start-ups in the short-term."
However, Mucci says that in the longer term a more important consideration for small-to-medium sized businesses that are growing will be the cadence and fraction percentages of future Fed increases.
"That will be a real concern for private businesses that are growing and need larger funding amounts that are only accessible by a bank or traditional lending channels. While I don't think the first quarter of a percent is likely to have a big impact on small businesses, we'll have to see what the Fed's increase frequency will be over time. They have not tipped their hand in that regard, but it will definitely be an important factor impacting the availability and access to capital businesses that are seeking to grow over the next few years."