By Mel Aanerud

Former Assistant District Director of the United States Small Business Administration

Suggestions to help Minnesota’s small business owners and potential small business owners.

Interest rates

I had a banker complain to me this month that he could not make as many small business loans as he wanted and that he thought the small businesses wanted and deserved due to rising interest rates. Small business owners are used to lower rates and they are delaying their borrowing. Today the average small business loan interest rate is 4.10%, but since the depression in 2007-08 the rate average have hovered around 3.31%.

I reminded him of the rates in the 1970’s of over 20% and of course he remembered those times as times when very few loans were made also.

He told me that he had calculated the average small business interest rate for the last three decades to be 8.21%, and my calculations agree with his. Small business people are not convinced by that statistic however. They do not see that today’s interest is a good deal since for the last decade rates were far smaller.

The Federal Reserve in 2007-08 reduced the Federal Discount Rate that banks have to pay for money borrowed from them to nearly 0%.  This was done to spur the economy that had spiraled into a depression worse than any since the great depression of the 1930’s. This worked and the economy has corrected itself.  Today it’s as strong as it was before that incident. The Federal Reserve has for the last year or more slowly increased that Federal Discount Rate to insure against inflation, thus interest rates on all debts are going up.

The Federal Reserve’s intention is to continue to increase that discount rate slowly for many months or years into the future.  Small business owners should know that the 4.10% rate the banks can offer now is as low as it will be for the extended future.  If owners intend to increase their work force, build a new facility, or buy new equipment, they should not wait for interest rates to go down, because that will probably not happen.

The only possibility for rates to go down is if a tariff and trade war begins as it did in the first two decades of the 20th century which most economists agree was a major reason for the resulting great depression in the 1930’s.  If that happens interest rates will go down, but with the economy in shambles those small business owners will not be borrowing money for totally different reasons.

My recommendation is that if anyone will want or need to make a major purchase in the near future, do it now, because interest rates are not going to be better in the foreseeable future than they are right now.

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