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Higher Rates May Cut Small-Business Borrowing Costs: Searching for Alpha for December 2015

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I wrote about the unintended consequences of artificially low rates a few months ago. A recent Wall Street Journal article examined another result of the ongoing stimulus – the unwillingness of big banks to loan to small businesses. 

After all, banks exist to make money for their shareholders; ranking out tiny loans to non-Fortune 500 companies isn’t likely to move the needle. The result is the development of so-called shadow banks, which are much more willing to lend. According to the WSJ article, nonbank lenders now account for 26% of all loans to small businesses, up from 10% in 2009. But they charge much higher rates – often multiples of the typical 5% to 6% that banks levy. 

A move by the Fed to raise rates would serve to increase the profit margin for such loans, making them more appealing to banks. The potential result is a reduction in borrowing costs for small businesses, assuming banks can gain market share from nonbank lenders. 

So in the economically unusual scenario known as quantitative easing, rising rates might actually stimulate economic growth.

How will investors fare in a higher rate regime?  As I’ve mentioned several times before, stocks actually perform pretty well as rates rise. And if the housing market can keep it together in the face of pricier mortgages, higher rates might be the catalyst this economy needs. 

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