US Small and Medium-Sized Businesses Struggle to Borrow Money... Average Loan Interest Rate in the 10% Range

US Small Business Administration Guaranteed Loan Interest Rates Exceed 10%
Double the Corporate Bond Issuance Rates of Large Companies
"Business May Have to Be Completely Shut Down"

The borrowing costs for small and medium-sized enterprises (SMEs) are soaring due to the Federal Reserve's (Fed) aggressive tightening. In contrast, large corporations are raising funds at relatively low interest rates through corporate bond issuance, leading to a concentrated impact of interest rate hikes on small businesses.

On the 22nd (local time), The Wall Street Journal (WSJ) reported that the average interest rate on loans guaranteed by the U.S. Small Business Administration (SBA) has surpassed 10%.

The interest rates on loan programs provided by the SBA are generally lower than bank rates. The fact that SBA loan rates have exceeded 10% means that SMEs borrowing from banks are facing much higher interest expenses. This is a consequence of the Fed raising the benchmark interest rate by 5 percentage points over the past 1 year and 2 months since it began hikes in March last year.

[Image source=Reuters Yonhap News]

The bank loan interest rate for Izard Ink, a publishing company based in Salt Lake City, USA, surged from 5.62% to 10.62% over the past year. The company had planned to expand its business-to-business (B2B) operations and triple its workforce this year, but has currently halted all plans due to soaring interest burdens. Tim McConahy, who runs Izard Ink, said, "Right now, I am reluctant to invest in any business."

This contrasts with large corporations that raise funds at relatively low interest rates through corporate bond issuance. Meta Platforms successfully issued corporate bonds worth $8.5 billion (approximately 11.1 trillion KRW) this month at interest rates between 4.6% and 5.75%. This is about half the borrowing cost of SMEs financing through bank loans. According to bond information provider Leveraged Commentary and Data, the corporate bond issuance rate for companies with the highest credit ratings was 5.3% as of the second week of May, down from 6% in August last year.

The problem is that the number of SMEs finding it difficult to borrow money despite interest rates exceeding 10% is increasing. Bank corporate loans have been declining every month this year. According to the Fed, commercial bank loans decreased by $105 billion (approximately 138 trillion KRW) in the first two weeks of March. Half of U.S. banks have tightened lending standards for small businesses.

Goldman Sachs research shows that 77% of SMEs are concerned about their capital-raising ability. A year ago, 77% of respondents said they were confident in raising capital, indicating a rapid change in the situation. Cash holdings of SMEs are also decreasing. In the first quarter of this year, companies with fewer than 250 employees saw their cash decrease by $7 billion (approximately 9.2 trillion KRW) compared to the second quarter of last year, while companies with 250 or more employees increased their cash by $61 billion (approximately 80 trillion KRW) during the same period.

Holly Wade, Executive Director of the National Federation of Independent Business (NFIB) Research Center, said, "Small businesses are facing rising supply chain costs, labor costs, and rent increases," adding, "With the added burden of rising borrowing costs, the pressure on these businesses is intensifying." She further stated, "The new high-interest-rate environment is forcing small businesses to either improve their management or completely shut down their operations."

This content was produced with the assistance of AI translation services.