Why are small businesses collapsing under the weight of high interest rates?

Small businesses, the engines of the economy, often face a major challenge: high interest rates. These can prove to be formidable obstacles, potentially leading to disastrous consequences for these essential economic players. But why are small businesses struggling to bear this financial burden? This is what we will explore in the following lines.

The Challenges of High Interest Rates for Small Businesses

THE high interest rates are not just a matter of numbers for economists, but a harsh reality for small businesses. Take for example Erin McKenna, owner of McKenna’s Bakery. His dream of expansion was shattered by rising borrowing costs. A reality that affects more and more small businesses.

The immediate impact on cash flow

When interest rates rise, loan refinancing costs skyrocket. For Erin McKenna, that meant a 15% interest rate to refinance her original $800,000 loan. Result: monthly payments reaching $8,000, threatening to siphon off its liquidity and make it impossible to pay salaries and rent.

Small businesses, with already thin profit margins, directly feel this rise in rates. Owners often have to dip into personal savings or sell assets to cover these unexpected costs.

Hidden costs: beyond loans

It’s not just loans that are becoming more expensive. Service rates, raw material costs and even rents can increase when businesses pass these increases on to customers. Julia Pollak of ZipRecruiter points out that companies in industries with a high density of small businesses, such as the hospitality sector, are most affected.

• More expensive raw materials
• Rising rents
• Higher employee turnover rate

The dilemma of increased debt

Businesses often face a stark choice: continue borrowing at high rates to survive in the short term, or risk going out of business. Erin McKenna had to sacrifice her expansion ambitions despite lucrative new opportunities with Disney, pushing her to scale back her menu and cut some essential costs like cake boxes.

This increased debt creates a spiral where businesses pay late fees and delay other payments, creating a harmful domino effect.

The consequences on employment and the market

Raising interest rates aims to curb inflation by reducing the amount of money in circulation. However, this strategy can also lead to increased unemployment and the closure of many small businesses. The leisure and hospitality sector is particularly vulnerable, with direct consequences on the employment of many low-income workers.

Difficult but necessary solutions

For McKenna and other small business owners, the situation requires creative solutions and careful management. Here, some measures often implemented:

• Reduction of unnecessary costs
• Inventory optimization
• Tight negotiations with suppliers

Although the situation is difficult, Erin McKenna remains optimistic, hoping to navigate this storm with decades of resilience and entrepreneurial ingenuity.

For these small businesses, every day is a new challenge, where every penny counts and astute management can mean the difference between survival and bankruptcy.