For companies that need to borrow money these days, it pays to be big.

The Federal Reserve’s rate-raising campaign has put a notable crimp in financing for companies with smaller payrolls and valuations. The average rate for a loan from the U.S. Small Business Administration, which historically costs less than a bank loan, has reached double-digits, driving many small firms to borrow less. 

Those include Tim McConnehey’s Izzard Ink publishing company in Salt Lake City. McConnehey had previously planned to beef up Izzard’s technology platforms and increase the company’s offerings for business-to-business sales, in part by tripling the number of employees and bringing on more freelance editors, designers and coders this year. 

Instead, he has focused on eliminating his company’s debt and scaling back growth, as the interest rate on the line of credit he holds at his bank increased to 10.62% from 5.62% over the past year. 

“I’m leery of making any kind of business investment right now,” McConnehey said. 

For companies with big balance sheets and lots of employees, it is a different story. Facebook and Instagram parent company
Meta Platforms
issued bonds for the second time in its history this month, raising $8.5 billion at rates ranging from 4.6% on bonds to be paid back in five years, to 5.75% for bonds to be repaid in 30 years. Those rates are around 1 percentage point higher than comparable bonds issued in the company’s inaugural bond sale in August 2022.

Fed Rate Increases Hit Small Businesses the Hardest  at george magazine

Tim McConnehey’s Izzard Ink publishing company is scaling back its growth plans.

Photo: Photo: Wendy McConnehey

Large companies are adding to the pandemic’s historic borrowing rush, mostly by issuing bonds in public markets. That has helped many to pay workers, continue mergers and acquisitions and buy back their own stock in the tumultuous times since. Issuance has climbed recently, and ratings firm
S&P Global
expects that nonfinancial U.S. companies will sell more bonds in 2023 than they did last year.

T-Mobile US,
& Co. also sold bonds this month, issuing $3.5 billion, $5.3 billion and $6 billion, respectively. Apple’s decision to issue new debt is “due more to its confidence in expanding cash flow than operational needs,”

Robert Schiffman,
senior credit analyst at Bloomberg Intelligence, wrote in a note.

During the second week of May, bonds issued by companies with top credit ratings paid an average of 5.3% in interest, according to data provider Leveraged Commentary & Data. That is higher than the 5.0% rate for April but still down from 6% in October. 

Interest rates on corporate bonds have fallen since October because of fears about the economy and the expectation that yields on government bonds will fall. Federal-funds futures markets show traders are betting the Fed will lower rates in the second half of the year by at least 0.75 percentage point, with many predicting a recession.

Small businesses had been the source of all of the net job growth in the U.S. between February 2020 and the end of 2022, defying the Fed’s efforts to cool the economy. This year, smaller companies are accounting for an increasing share of layoffs.

U.S. companies with between one and nine employees laid off or fired 341,000 workers in March, more than twice as many as in February, according to data from the government’s Job Openings and Labor Turnover Survey. That was the highest number of layoffs and discharges since May 2020 and four times as many as these companies reported in March 2022.

Companies with fewer than 250 employees accounted for 81% of all layoffs and discharges in March. That compared with 71% in March 2022 and 68% in March 2021.

Fed Rate Increases Hit Small Businesses the Hardest  at george magazine

The Fed’s actions have made small-business owners more concerned about accessing capital.

Photo: Ting Shen/Bloomberg News

Large companies raise most of their funds from capital markets by issuing bonds. Smaller companies rely predominantly on lending from banks. And commercial and industrial lending by banks to businesses has fallen every month this year.

Commercial bank lending dropped by a record $105 billion in the first two weeks of March, according to the Fed. Nearly half of all U.S. banks said they are raising their standards for lending money to small companies, with 56% of lenders reporting falling demand. 

A recent survey of small-business owners from Goldman Sachs 10,000 Small Businesses Voices found 77% reporting they are concerned about their ability to access capital. The investment bank called it a “stunning shift” from one year ago, when 77% of respondents said they were confident in their ability to access capital.

This owes largely to the Fed’s actions and recent regional bank stress, said

Joe Wall,
national director of Goldman Sachs 10,000 Small Businesses Voices.

“The net effect is that lending is just tightening across the board for small businesses,” he said.

This difference is becoming evident on balance sheets. Companies with more than 250 full-time employees saw their cash positions rise by $61 billion between the second quarter of 2022 and the first quarter of 2023 to $2.38 trillion, according to data from S&P Global. Companies with fewer than 250 employees have seen their cash balances shrink by $7 billion to $169 billion.


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In the first quarter, small companies held about 13% less cash and cash equivalents on their books than they did in the first quarter of 2022. That compared with a 7.8% decline at large companies during the same period.

The eroding cash position has weighed on small companies’ confidence. A survey of small businesses last month showed optimism at the lowest level in 10 years, with the percentage of small companies saying it was difficult to get credit holding near its highest since 2012, according to the National Federation of Independent Business. 

The higher funding costs are adding even more pressure to small-business owners because they are also facing higher costs for supplies, labor and rent, said

Holly Wade,
executive director of the NFIB Research Center.

“Those who are receiving financing, it’s costing more,” Wade said. “It’s all part of having to manage increased costs all around.”

For McConnehey, that has meant higher costs for paper, printing and distribution. So he is pushing back his growth goals by a number of years to focus on keeping his company afloat. 

The new higher-rate environment is “forcing small businesses to be better,” he said. “Or not be in business at all.”