The past year has seen a profound change in interest rates for loans of all kinds, including below-market rates through government-backed business loans like those we offer at Seedcopa + SeedcoDE. Before we dive into my annual Business Lending Outlook, first let’s examine what got us here:

• In the past decade, we’ve seen historically low SBA 504 rates ranging from three to five percent, effective-fixed for the full 25 years of the loan, in reaction to the Great Recession of 2008 and then the COVID-19 pandemic. With SBA 7(a) rates being based upon Prime Rate, 7(a) rates ranged between five to eight percent.
• Then, in concert with the pandemic, SBA 504 interest rates dipped down to the high two percent to low three percent range, hitting historic 40-year low rates since the SBA 504 loan program’s inception.
• When we returned to interest rates in the four to five percent range in early 2022, we felt the pain profusely, even though we were technically returning to pre-pandemic interest rate levels to try to combat inflation and control a hot job market that was hard on businesses.
• We’re now seeing interest rates that are actually at or near historic averages. According to FedPrimeRate.com, the cumulative average of the Prime Rate is 6.803 percent. The true anomaly is the frequency in the increases in rates, happening at a pace we haven’t seen in decades.

There’s a lot of commentary out there that people just need to “get over” the psychological hump of paying increasing rates. The December 2022 SBA 504 effective interest rate was 6.11 percent, but again that was fixed for 25 years. The maximum allowable SBA 7(a) loan rate is Prime Rate + 2.75 percent, so based upon the December 2022 Prime Rate of 7.50 percent, that was 10.25 percent — double-digit interest rates! The real challenge is this: Are we able to see these interest rates for what they really are, in the context of decades of fluctuations, or do we resort to pessimism and simply focus on rates being so much higher than a year ago?

I’ve spent the past 16 years in government lending here at Seedcopa + SeedcoDE, plus an additional 14 years in the banking industry specializing in commercial banking, retail, and investment services. For me and my fellow veteran small business lenders, none of this is a new experience, however frustrating it may be. Rates will go up and rates will go down. Most important in the conversation is this: How are small business borrowers affected in both the short term and the long term?

Here’s what I see right now:

• When interest rates hit the six to seven percent range in the last quarter of 2022, I saw familiarity. We experienced this in 2008 and then saw a steady decline in interest rates, hitting the “normal” four to five percent range a year or two later. We’ve seen this before. We don’t like it, but the entrepreneurship of this country historically shows that we will continue on.
• Now that some programs are potentially lending at double-digit interest rates, this is above the normal but not unprecedented. We saw this in 1998, and then saw another steady decline in interest rates. Again, we don’t like it, but we need to continue on.
• While a return to historically normal or below normal levels of interest rates would be everyone’s preference, we know it’s not sustainable or “normal” for our economy.

So what should we expect in 2023, and how should we prepare for it?

• The lending markets began to pull back a bit on new small business loans in 2022, and we should expect them to continue to do so in 2023 in light of the Fed rate hike.
• This gives small businesses fewer options for financing, but also an opportunity. Small business owners with consistent revenue and strong credit will always be best positioned, but government-backed loans like the SBA 504 and 7(a) offered through Seedcopa + SeedcoDE are here for the start-up, projection-based or less-than-perfect small business.
• We believe we will continue to offer the lowest, long-term fixed interest rates in the marketplace. That is our core mission through the U.S. Small Business Administration. The tradeoff to those excellent rates hasn’t changed: A more detailed application process than you would have with a traditional loan, but a potentially higher payoff in the end. As a small business, is that worth it to you? In this financial environment, it becomes more imperative to decide.

Also more imperative than ever before: Long-term relationships with lending partners you trust. When we know you, we can more quickly understand the capital you qualify for and your interest rate. This helps you better determine your best options. It also paves the way for trusted lending relationships for years to come – in times of lower interest rates as well! (Check out these long-term success stories: Couch Tomato, Mont Clare Deli & Market, Creative Kids.)

The core question is always the same for you as a business owner: What is the cost of making changes to my business that will ultimately enhance revenue? How quickly can I make this money back, in relation to the cost of funding and duration of payments? Seedcopa + SeedcoDE’s SBA lending programs will continue to be a popular option. Even with rising interest rates over the past year, the SBA reports record-breaking loan volume for the 504 loan program — even higher than in 2021. Join us.

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Sherwood Robbins is the Managing Director of Seedcopa + SeedcoDE. He has been with the organization since 2007 and is proud to help business owners turn their dreams into reality. Seedcopa + SeedcoDE is a multi-state CDC, serving all of Pennsylvania and Delaware, and has a proud history of supporting small businesses with government-backed loans for 40 years with the Chester County Economic Development Council (CCEDC). Sherwood can be reached at srobbins@seedcopa.com or 610-321-8241.