- The Washington Times - Sunday, July 4, 2004

The first interest-rate increase in four years isn’t likely to change the way most small-business owners work, at least for now. It’s the series of rate increases expected over the next year that will have a greater impact.

“You’ll have to see rates move by 100 basis points (1 percentage point) before people need to start worrying about it,” said William Dunkelberg, chief economist with the National Federation of Independent Business, a District-based advocacy group.

That’s not to say businesses won’t feel a pinch from the Federal Reserve’s decision Wednesday to raise rates by 0.25 percentage point. Any company that has debt or a line of credit with a variable interest rate will find its borrowing costs going up, probably immediately. And businesses applying for new loans, or renegotiating existing debt, will also be paying more.

Many young businesses are financed through their owners’ personal credit cards or home equity lines of credit. Depending on the terms of the credit card or loan, these owners will also pay more to borrow.

But Martin Regalia, chief economist with the U.S. Chamber of Commerce, put the increase in perspective: Rates are rising because business is good.

“The underlying economy, which is what’s pushing rates up, is a benefit for small businesses, for their outlook and profits, all of which tend to make credit more available, and which give them the wherewithal to afford more loans,” Mr. Regalia said.

Companies that want to expand accept higher rates as part of the process. But business owners concerned about higher borrowing costs can take steps to ensure that they get more favorable rates from their lenders.

Daniel Ray, editor in chief of Bankrate.com in North Palm Beach, Fla., suggested that business owners “pay down debt so credit ratios will be in order when you have to go and borrow at these higher rates.”

Mr. Ray also noted that business owners tend to have deeper relationships with bankers than consumers do, and that can help a company get more favorable credit terms. His advice is to “renew and review your relationship with your lenders.”

Mr. Ray said owners have a growing number of options for lower rates, such as credit unions that are expanding into business lending.

One reason why the Fed is raising rates is to make it harder for companies to borrow. That’s the central bank’s antidote to economic growth that’s too fast and that feeds inflation. And so some businesses might find that as rates rise, credit is harder to come by.

But, as Mr. Regalia noted, “there’s plenty of credit available.” Whether a company can get a loan is likely to turn more on its own circumstances than on a series of modest interest-rate increases.

If they want to improve their credit and their ability to service their debt, business owners need to focus on improving their finances. They also should take time now to look at expenses and see where they can be lowered.

They should also consider their companies’ credit ratings. By paying bills on time, they’ll have better ratings and enable their businesses to borrow at better rates.


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