Small businesses in the US are surprisingly resilient in the face of higher interest costs, according to Goldman Sachs Research. Despite typically paying higher interest rates compared to larger corporations, small businesses seem well-positioned to absorb the impact of increased borrowing costs. The Federal Reserve's recent interest rate hikes are expected to affect small businesses, but the full impact has yet to be felt. The research suggests that, on a relative basis, small businesses are less vulnerable to funding stress than larger companies.
Goldman Sachs economists Manuel Abecasis and Spencer Hill estimate that small businesses paid an effective interest rate of approximately 10.5% in 2019, compared to 6.5% for the corporate sector. The impact of higher interest rates on small businesses is still in the early stages, given that their debt is split between short-term, floating-rate obligations and longer-maturity term loans.
The economists predict that higher rates will increase the interest burden for small businesses, as a share of revenues, by just over one percentage point by 2024. This represents a moderate increase from around 5.8% of revenues in 2021 to approximately 7% next year. Although it is above pre-pandemic levels, it is similar to the mid-1990s.
Higher interest expenses are expected to have a modest effect on small businesses' investing and hiring. Capital expenditures are forecast to decrease by around 0.1%, and labor costs are expected to decrease by 0.17% as a share of the sector's gross output.
Despite some challenges, small businesses are proving resilient due to factors such as strong profits, ample cash on hand, and a financial surplus estimated at 2.5% of US GDP in the second quarter. Small businesses' cash holdings and net worth are at their highest levels in years, contributing to their ability to weather the impact of higher interest costs.
Goldman Sachs Research emphasizes that small businesses appear to be in good shape to navigate the ongoing challenges posed by increased borrowing costs. While higher rates may have some effect on investing and hiring, the overall resilience of small businesses is attributed to their financial surplus and robust financial position.
