U.S. small businesses are paying more for loans than they have in 16 years, as the Federal Reserve’s aggressive rate hikes have pushed up borrowing costs.

Average interest rates on short-term loans to small businesses rose to 9.2% in June, up 1.4 percentage points from May — the largest increase in short-term borrowing costs since December 2006, according to data this week from the National Federation of Independent Business (NFIB).

Rising Borrowing Costs Intentional: In its continued effort to curb demand and rein in inflation, the US Federal Reserve has attempted to tighten lending standards with 500 basis points of rate hikes from March 2022. But the recent improvement in the inflation outlook is long overdue. The expected restriction on lending to small businesses has not really taken hold.

Twenty-eight percent of firms surveyed by the NFIB borrowed regularly in June — down from a three-year high in April, but largely at the same level of lending activity as in years before the coronavirus pandemic.

Meanwhile, loan approval rates stabilized or improved slightly after months of decline, according to a separate report by online small business financing platform Biz2Credit.

Small banks sanctioned 18.8% of loans in June, up a tenth from May. Interest rates at major banks remained steady at 13.4%, the first increase since January, according to Biz2Credit.

Entrepreneurs connect with this stability: Only 6% of respondents to the NFIB survey reported that it was more difficult to get a loan recently than when they last sought credit. That’s down from a decade-high of 9% three months ago, and broadly in line with historical averages.

“There was a big expectation of a recession and it didn’t materialise, so I think the overall economic outlook has improved and given banks more confidence to resume lending,” said Rohit Arora, CEO of Biz2Credit.

Banks protect

It is not yet clear whether this relative stability will continue.

Despite recent modest improvements, both small and large banks are taking on about half as much credit as they did before the pandemic, and economists warn that the slowdown could be the result of aggressive rate hikes on credit availability. Turmoil in the banking sector caused by the bankruptcy of Silicon Valley Bank and two major US lenders earlier this year may encourage banks to take a more conservative stance.

The annual growth rate of US bank loans is the lowest in ten years and is likely to turn negative soon. According to the Fed, it was the biggest decline ever in bonds such as those held by banks on their balance sheets, which fell more than 10% year-over-year. Growth in loans, which represent 70% of all bank loans, is close to its historical average, but decelerating.

On top of that, demand for commercial and industrial loans was the lowest in a decade in the latest U.S. Federal Reserve survey of bank loan officers at the start of the second quarter, leading to a slowdown in corporate loan growth. Outstanding C&I loans rose just 3.4% at the end of June, a double-digit increase from earlier this year and the lowest in a year.

Three of the biggest U.S. banks will report their second-quarter results on Friday, which will reveal more about how rising deposits and falling bond yields could affect credit availability for the rest of the year.