How Preemptive Interest Rate Hikes Impact Businesses

When the Fed dramatically raised interest rates in 2022, few wanted to buy commercial properties. The existing owners in the meantime were faced with large loans requiring refinancing at much higher interest rates where rent growth could not cover the added financing costs. That’s because commercial real estate loans, unlike for home mortgages, are of short duration and require frequent refinancing. Commercial property values fell consequently. Crashing prices were seen especially in the office sector due to fewer tenants paying rents. Lower collateral values make it even more difficult to refinance. The loans were held principally by small local and regional banks and not big banks. It was inevitable and not surprising to anticipate many small banks going under. Miraculously though, many small banks are holding on. Rather than call-in loans at higher rates, many appeared to have been renegotiated to buy some time … in the hopes that the interest rates go down. The Fed rate cut in September and several more in upcoming months will therefore be most closely watched by small-sized banks and by commercial real estate loans borrowers. Lower rates will strengthen balance sheets of small banks and provide more lending for commercial real estate.

The PPI data released this morning for April came in hot, rising 0.5% in April, vs. 0.3% expected and 0.2% last month. Excluding food and gasoline (core PPI) also came in hot, at 0.5%, vs. 0.2% expected. Wholesale prices rose rapidly both for goods and services. 🔥 The hope had been that wholesale prices for services would be rising more slowly and that goods prices would be flat or even falling, now that pandemic supply chain troubles have largely been resolved, offsetting services inflation. Slow wholesale inflation overall would be an encouraging signal for future consumer price inflation. Unfortunately, both wholesale prices and consumer prices have been rising too quickly for comfort so far this year, raising concern that the Fed might choose to keep interest rates high all year and delay its first rate cut. The longer rates stay high, the more the economy will have to reprice. More will come due for refinancing and have to be refinanced at substantially higher rates. More and more families will decide they can't wait forever to purchase a vehicle or a home, and will have to bite the bullet on higher rates. The rising cost of credit could put a slow squeeze on businesses and households, reducing what they have left to spend on consumption, other investments, and hiring. High interest rates can also erode the value of bonds and real estate, affecting the balance sheets of companies that rely on such assets, and lowering their overall valuations and strategic options. The Fed views current interest rates as restrictive—and most businesses will attest that they are slowing activity and delaying investments. The hope is that these high rates are simply operating with a lagged effect, and that they are continuing to wring inflation out of the economy, even when monthly data bounces around and it doesn't look like it. The road to more normal inflation rate won't be linear, but we are most likely still on it. Look forward to more encouraging data in the months ahead. (The Producer Price Index (PPI) measures the prices local producers receive for their goods and services. "Wholesale prices" is the common shorthand for PPI, and there is two-way causality between wholesale prices and consumer prices. For example, wholesale wheat prices affect consumer prices for pizza at restaurants and sandwich bread in grocery stores, while consumer prices for cars and auto parts affect wholesale prices of business insurance plans.)

Corporate America is staring at a wall of debt maturities. Over the next five years, more than a trillion dollars of leveraged loans, high-yield bonds, and investment-grade debt will come due annually. Much of it was issued in a low-rate environment. Now it has to be refinanced at far higher rates. For businesses, that reality shows up in debt servicing costs. Interest expense climbs, EBITDA coverage shrinks, and lenders are paying closer attention to true DSCR. When modeling, it isn’t enough to look at senior debt alone. Subordinated debt and other obligations must be included to understand real coverage. This is where many companies get caught off guard. On paper, earnings look strong, but when stress-tested against higher refinancing costs and full debt obligations, the coverage ratio slips quickly. A company that once had a comfortable 2.0x DSCR can find itself close to breaching covenants when rates reset. For business owners, this means running the math now, not later. Model your EBITDA against all debt service, including subordinated tranches. Run scenarios with higher rates. Protect liquidity so you have flexibility when maturities arrive. The chart makes it clear: the refinancing wall is real. The businesses that prepare will have options. The ones that wait will have problems.

This chart highlights a growing concern in U.S. corporate credit markets: the sharp rise in “zombie” companies — firms whose interest expenses now exceed their operating income. According to Bloomberg data, the number of such firms within the Russell 3000 has surged to the highest level since 2022, reflecting the sustained impact of high borrowing costs in a post-tightening environment. The data underscores how prolonged elevated interest rates are reshaping corporate solvency dynamics. Many of these “zombie” companies were able to survive during the zero-rate era through cheap refinancing and abundant liquidity. However, as debt matures and refinancing costs reset at far higher yields, their interest coverage ratios collapse, revealing structural fragility beneath headline equity valuations. This development also has broader macro implications. The persistence of overleveraged, non-productive firms can weigh on aggregate productivity and investment, while creating distortions in credit allocation. Historically, similar spikes in zombie companies have preceded or coincided with credit tightening cycles, widening spreads, and rising default rates in speculative-grade debt. In essence, this chart is a warning sign: while equity markets remain buoyant, financial stress is quietly accumulating in the corporate underlayer. The combination of high rates, slowing revenue growth, and constrained refinancing options could test the resilience of U.S. credit markets over the next few quarters — especially among smaller-cap and cyclical sectors most exposed to floating-rate debt. Source: Bloomberg

The Federal Reserve Board held #interestrates steady yesterday, as expected, while also signaling that rates will likely "stay higher for longer". The board also issued a new dot plot (see image below, courtesy of Yahoo Finance) that shows their adjusted expectations for the future rate environment, including a first look at 2026. The short summary of the dot plot's movement is that the FED now expects the Federal Funds Rate, which influences borrowing costs for consumers and businesses, including the rates for mortgages, autos, student loans, and all other variable rate #loans, to be about 0.5% higher in both 2024 and 2025. With #inflation remaining persistently above the FED's 2% target, none of this should come as a surprise. My view has long been that we've entered a new inflation paradigm, and we're unlikely to see cost pressures retreat to the FED's target range anytime soon, barring a substantially worse #recession than the one likely on the horizon. Alex's Analysis: What does this mean to business leaders? Simply put, you have to consider the numerous ways that the interest rate environment affects your day-to-day operations and longer-term #strategy. Here are some examples of how high interest rates affect your business: 1️⃣ High rates limit your cash flow. More expensive debt means using more of your cash to cover interest costs. It also limits your ability to invest in long-term growth and causes less day-to-day cash flow stability. 2️⃣ High rates prevent you from getting short-term credit. Qualifying for new loans will require higher credit standing or scores, while repayment challenges will constrain your ability to borrow more money. 3️⃣ High rates lead to lower demand for your products and services. As clients become more cost-sensitive and gravitate towards the "must haves", your customer retention or acquisition rates will likely drop, undermining sales. 4️⃣ High rates make it more difficult to plan for the future. It will be harder to update your financial plan and prepare for future growth, especially if you have variable-rate loans. This will affect decisions about R&D spending, hiring plans, inventory management, and many other things. One concrete piece of advice I can offer is that you should assume no attractive financing will be available for the next 12-24 months, so optimizing cash flow to fund current operations and future investment must be a priority as you plan for 2024. Hope that helps and happy planning!

Today, I want to address an important issue affecting many Canadian small businesses: the recent rate increases implemented by the Bank of Canada. While the intention behind these increases may be to control inflation and stabilize the economy, it's crucial to understand the adverse impact they have on our entrepreneurial community. Small businesses are the backbone of our economy, driving innovation, creating jobs, and fostering local economic growth. However, when the central bank raises interest rates, it unintentionally adds an extra burden to these businesses. Here's why it matters: 1. Higher borrowing costs: Small businesses often rely on loans and credit to fuel their growth, invest in equipment, and expand their operations. With increased interest rates, borrowing becomes more expensive, making it harder for entrepreneurs to access affordable capital. This hampers their expansion plans and limits their ability to compete effectively. 2. Reduced spending: As interest rates climb spending tends to decline. This can lead to decreased sales for small businesses, especially those in sectors heavily reliant on discretionary spending. The decrease in sales ultimately leads to job losses, amplifying the negative impact on both businesses and individuals. 3. Competing against larger corporations: Small businesses already face an uphill battle when competing with larger corporations that have substantial resources. Higher interest rates exacerbate this inequality by disproportionately affecting the affordability of capital for small enterprises. Consequently, larger players secure more favorable terms and invest more heavily, widening the gap and hindering the growth potential of small businesses. As advocates for the Canadian small business community, it is vital for us to raise awareness about these challenges. By encouraging dialogue and exploring alternative solutions, we can work towards policies that support a thriving entrepreneurial ecosystem while considering the impact on small businesses. Please feel free to share your thoughts in the comment section below. Kindly like, comment, and repost to help raise awareness for our small businesses #work #growth #job #community #jobs #smallbusiness #canada #interestrates #entrepreneurs #SmallBusinessesMatter #Entrepreneurship #canadianeconomy #bankofcanada #sme #economy #smallbusinessowners #smallbusinesssupport #innovation

"Rates up = bad for tech." That frame is too simple. By now you've all heard it: Last week the ECB raised its deposit rate to 2.25%. The first hike since 2023. But it’s not as most headlines I saw recently frame it → this move has three different audiences and three different reads. My take on it: I believe most of the effect is already priced in, because yields started moving weeks ago in anticipation. The visible part just rolls in over the next 30-60 days, as longer-term contracts expire. But how exactly is it affecting the market? For banks and money-handling institutions: good news. Higher rates mean more income on the same balance sheet, with no new work required. If you make money on funds, you make more money tomorrow than you did yesterday. Congratulations (me included haha). For founders raising venture: no immediate effect. But every leg up in rates pulls some marginal capital out of VC and into safer yield. We've seen this movie before: the 2023 / first-half-2024 funding winter wasn't an accident. If the ECB ends up around 3.5–4%, which I honestly don't see in the current trend, expect that movie to replay. At 2.25%, the lights are still on. For founders and business owners sitting on cash: this is straightforwardly good news. Money you've already raised, money in operating reserves, money waiting to be deployed. It earns more yield tomorrow than it did yesterday. The default of "leave it in the bank account" just got meaningfully more expensive. This is exactly the moment we built Vivid Treasury for: operating cash earning market rate, not whatever-your-bank-feels-like rate. If you raised in 2023, you already learned the lesson. Treasury is not exotic, it's basic financial hygiene. The ECB just made it more expensive to ignore. #Vivid #ECB #Treasury #Fintech

This January Franchise Times article by Laura Michaels draws strong attention to the impact of interest rates on franchise development. In the recent BoeFly, Inc. survey of  franchisors, they are "increasingly worried about the impacts of rising interest rates and are less confident they’ll meet growth goal." The chart below outlines the findings. A few thoughts on this: ▶ These findings demonstrate that service brands or lower investment brands have the potential for significant upside while capital intensive ones will bear the brunt of this impact. ▶ Resales of existing units which have already been fully capitalized, paid for and are now selling on a multiple of earnings will be increasingly attractive to those in the market. The "buy it versus build it" trend we wrote about in our book, Appetite for Acquisition is real. ▶ Existing "second-generation" space available to conversion has been on fire since the pandemic and will also be fueled by these interest rate trends. Remember, these rates have also caused developers to slow their start on shopping centers. We're heading toward a real estate crunch. ▶ Those in capital intensive spaces, like restaurants, are beginning to look at ways to diversify their holdings. Rather than expanding outside the space you know, why not consider an adjacent opportunity like the We Sell Restaurants brand? It's the restaurant business with banker's hours PLUS low cost of entry and excellent return. Thoughts, franchise community? Key takeaways from article which surveyed around 700 executives:: ➡ Only 50% of the C-level executives surveyed are confident of meeting growth goals, down from 76.9% in April. ➡ Majority of franchisors (86.7%) reported that current interest rates are negatively impacting their growth plans. Link to the article in the comments. #WeSellRestaurants #Restaurantbusiness #restaurantindustry

Your expansion plans have just become 3 times more expensive. Two years ago, you could borrow at a rate of 4%. Today it’s 12%. That loan for equipment, expansion, or working capital just became unaffordable. Most small business owners are frozen. Can’t grow without capital. Can’t afford the available capital. Here’s what’s happening: → SBA loans are harder to qualify for → Lines of credit are shrinking or disappearing → Equipment financing costs are eating profit margins → Real estate purchases are off the table What an anticipation mindset could do for your business: → Self-funding growth through retained earnings → Finding creative financing through vendors → Partnering instead of buying → Focusing on capital-light growth strategies High interest rates don’t stop growth. They change how you grow. Stop waiting for rates to drop. Start adapting to the reality we’re in.