Tired of being an employee and want to make more money? Start your own business! Advice like that spreads. Starting a new business is a challenge, requiring entrepreneurs to surmount numerous obstacles. One of the most significant factors that can complicate such an endeavor is operating in a rising interest rate environment. Borrowing costs increase, access to credit tightens, and consumer spending may decline, resulting in a difficult environment for new businesses. This is not just about the difficulties faced by startups in a rising interest rate environment but how this trend favors large businesses, exacerbating the centralization of industry.
The most direct challenge faced by new businesses in a rising interest rate environment is the higher cost of borrowing. Commercial loans, credit lines, and other forms of financing become more expensive, leading to higher debt servicing costs for startups. Revolving credit lines are very sensitive to rate moves. As a result, entrepreneurs might be hesitant to take on loans, limiting their ability to invest in expansion and growth opportunities.
The FED may pause or pivot, but it has directives concerning inflation, not small business success. Rising interest rates often prompt lenders to adopt more cautious lending practices. Risk free investments are close to 5% so your fledgling firm better generate big returns. Banks and financial institutions become more risk-averse, making it challenging for startups to secure funding. The stringent criteria for loan approval can limit access to credit, particularly for businesses with limited track records or uncertain revenue streams.
The other side of this is the problem of consumer demand in a debt fueled economy. As interest rates rise, the cost of borrowing for consumers increases. This translates to higher interest payments on mortgages, car loans, and credit card balances. The average credit card rate is well over 20% now, reaching highs not seen in decades. Consequently, consumers will cut back discretionary spending. America has not seen real wage growth under Biden so debt servicing bites more out of household income. This decline in consumer spending negatively impacts new businesses, especially those in service industries heavily reliant on consumer demand.
The negative side effect is how this plays into the hands of big business. Decades of laissez faire merger regulation has created economic sectors dominated by several major firms leaving +/- 20% of the market for everyone else. Giant businesses have more significant financial reserves and greater access to capital markets compared to startups. In a rising interest rate environment, these established enterprises can leverage their financial strength to weather the higher borrowing costs and maintain or even expand their operations.
With that debt edge, large firms can lean on their lower marginal costs for production. Large corporations benefit from economies of scale, which allow them to produce goods or services at a lower cost per unit. This cost advantage becomes even more critical during times of rising interest rates when smaller businesses struggle with higher operational costs and limited access to affordable financing.
Add it all up and it becomes a situation where good small businesses may fail and be acquired by other firms. Who will be diamond level borrowers for such acquisitions? The big boys! They can buy IP and talent and pick and choose what to keep. As new businesses struggle to establish themselves, golden offers from giant corporations can snatch them up. They swoop in to acquire good firms’ assets or buy out threatening competitors. This trend contributes to the centralization of industry power in the hands of a few dominant players, reducing competition and potentially stifling innovation.
Policymakers must recognize these dynamics and consider strategies to foster a more supportive environment for startups and small businesses to thrive even in the face of rising interest rates. Now does anyone think the lobbying power of smaller businesses compares to mega-corporations? Of course, no one does. We will see more cartels form as smaller firms are whittled away. The system likes that because it is much easier to shake four big piggy banks than collect coins from all over the house.
-By Henry Delacroix
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Libertarians be like: “Well yeah, the megacorporations own everything and are making life miserable for everyone. Sure, they’re buying up all the land and refusing to sell, ensuring the majority of society will be land-free debt slaves. But it’s their private proprety, bro! You just have to deal with it! Wanting a government to ensure that the majority of citizens are independent property owners is literally fascism/communism.”
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A vitally important distinction here is to understand is that if you’re business model is primarily online, you’re competitive forces are vast and should you get real traction, you are on the radar for The Bigs. Not only that, online first businesses require significant skill sets most small teams don’t have and frankly can’t afford. My advice is to build something serving a small geographic space and focus on services (fixing, building, serving). You many never become a mogul, but you can achieve independence and have a good life. A Dixie first local approach also means you become an asset and important for your actual community.