Amid Economic Ups and Downs, 2 in 3 US Businesses Say Interest Rate Changes Aren’t Negatively Affecting Them
Inflation and rising interest rates have significantly impacted consumers over the past few years. In response to economic shifts, consumers have altered their spending and other financial activities. But consumers aren’t the only ones feeling the pinch. Businesses face rising operating expenses, increased labor costs and supply issues. All these factors make for a challenging environment for today’s companies.
There’s a bright spot amid the uncertainty, though; the negative impact of high interest rates on businesses may be easing. The latest LendingTree study analyzes the percentage of companies impacted by rising interest rates over the past six months and how that has evolved.
Our study found that 2 in 3 businesses report no negative impacts from changing interest rates, and 3 in 10 expect their companies to perform above average in the coming six months.
Key findings
- 2 in 3 (65.9%) U.S. businesses report no negative effects from changing interest rates over the past six months. That’s a 7.0% increase from September 2023, when 61.6% of businesses reported no negative effects in the prior six months.
- Among the businesses that negatively feel changing interest rates, decreased profitability is the top impact. 28.4% of businesses say interest rate changes decreased profitability over the past six months. Next, 11.5% say interest rate changes made them unable to invest in their business.
- South Carolina businesses are the most likely to report negative effects from changing interest rates. Here, 4 in 10 (40.0%) businesses say changing rates impacted them over the past six months. Oregon (39.7%) and Utah (39.6%) businesses follow.
- Just 11.2% of District of Columbia businesses report that changing interest rates negatively impact business — the lowest by state. Alaska and Maine rank second- and third-lowest, at 22.2% and 27.1%, respectively.
- Despite the negative effects of changing interest rates, businesses are doing better. 30.0% of businesses say their current performance is above average, and 30.1% expect their performance will be above average in the next six months. On the other hand, 22.3% say their current performance is below average and just 18.0% believe it’ll be below average in the next six months.
Businesses less likely to report negative effects from changing interest rates
When asked to reflect on the impact of interest rate fluctuations, 65.9% of U.S. businesses report no adverse consequences over the past six months. This is a 7.0% increase from September 2023, when 61.6% of companies reported no negative repercussions from shifting interest rates.
Respondents were asked to reflect on how interest rate changes affected their business in the previous six months. This means small business owners answering the most recent survey in March 2024 commented on how their business performed from September 2023 to March 2024, while those answering in September 2023 reflected on their business performance from March 2023 to September 2023.
% of businesses reporting no negative effects from changing interest rates
| % of businesses in September 2023 | 61.6% |
| % of businesses in March 2024 | 65.9% |
Source: LendingTree analysis of U.S. Census Bureau Business Trends and Outlook Survey (BTOS) data collected in September 2023 and March 2024. Note: Respondents were asked to consider the past six months.
The increase in businesses reporting no harmful effects from interest rates in the past six months could be multifaceted. Interest rates climbed throughout 2023 and peaked in the latter half of the year, so businesses faced more interest rate volatility between March 2023 and September 2023 than between September 2023 and March 2024.
For reference, the U.S. prime rate, which fluctuates in response to the federal funds rate and is a benchmark rate for various types of lending, entered 2023 at 7.50%. It shifted four times between February and July 2023, ending the year at 8.50%. The U.S. prime rate has held steadily at 8.50% since peaking in July 2023.
Interest rates from January 2023 to May 2024
| January 2023 | February 2023 | March 2023 | May 2023 | July 2023 | May 2024 | |
|---|---|---|---|---|---|---|
| U.S. prime rate | 7.50% | 7.75% | 8.00% | 8.25% | 8.50% | 8.50% |
| Federal funds target range | 4.25% to 4.50% | 4.50% to 4.75% | 4.75% to 5.00% | 5.00% to 5.25% | 5.25% to 5.50% | 5.25% to 5.50% |
In addition to facing fewer interest rate fluctuations in recent months, many businesses have taken measures to navigate climbing interest rates over the past few years.
For example, a study from the Federal Reserve Bank of Minneapolis, which surveyed businesses in five Midwestern states and one Western state, suggests that more companies held back on hiring in 2023 than the prior year. These adjustments and others made, such as raising the prices of products and services, have helped businesses navigate the elevated interest rate environment, creating a new normal amid economic uncertainty.
Decreased profitability is top effect of changing interest rates
Among the businesses that report negative impacts from shifting interest rates, the primary consequence is a decline in profit — 28.4% of business owners say interest rates have chipped away at their profit margins. Notably, this is a 12.9% decrease from the 32.6% of businesses that cited decreased profitability as a top negative effect in September 2023.
One factor likely contributing to a decline in profits is that many businesses aren’t compensating for increases in their operating costs. Our research shows that 38.7% of companies are paying more for goods and services, but only 15.4% charge their customers and clients more. For some companies, another reason for the decrease in profits is a decline in demand — 22.4% of business owners say demand has dropped.
While decreased profitability is the top negative effect, business owners feel the impact of elevated rates in other ways. For example, 11.5% say rising rates have prevented them from investing in their business, 5.3% cite an inability to refinance their loans and 5.1% are unable to service their debt.
How changing interest rates negatively affect businesses
| Negative effect | % of businesses |
|---|---|
| Decreased profitability | 28.4% |
| Inability to invest in their business | 11.5% |
| Inability to refinance existing loans | 5.3% |
| Inability to service debt | 5.1% |
| No negative effects | 65.9% |
Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents, who could select multiple negative impacts, were asked to consider the past six months.
“Generally speaking, higher interest rates shrink a business’s financial margin for error,” says Matt Schulz, LendingTree chief credit analyst. “They lower a company’s overall profitability, leaving less money to invest in the business or pay off existing debts.
“It also doesn’t make sense to refinance existing loans because the new interest rate will likely be higher than the old one,” Schulz adds.
Naturally, consumers pull back on spending when interest rates are elevated, impacting some businesses more significantly than others. For example, companies specializing in luxury products or services may see a more significant decline in consumer demand than those providing essential services.
South Carolina businesses most likely to feel impacted by interest rates
Our study showed that businesses in South Carolina experience adverse effects of elevated interest rates more than small businesses in other states — 40.0% of companies in the Palmetto State report negative impacts from interest rate changes in the past six months.
Similar to national trends, the most significant impact on South Carolina businesses is decreased profitability — 33.8% of business owners say they’re experiencing reduced profit due to interest rates.
Like the rest of the country, South Carolina is battling inflation, low housing affordability and increased labor costs. However, South Carolina’s economy grew slower in 2023 than in 2022, while the U.S. economy at large saw more growth year over year. This slower recovery could be a factor in why more businesses in the Southern state experience damaging effects from elevated interest rates.
| How changing interest rates negatively affect South Carolina businesses |
|---|
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Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents, who could select multiple negative impacts, were asked to consider the past six months.
Other states with a considerable rate of businesses experiencing negative effects from high interest rates in the past six months include Oregon (39.7%) and Utah (39.6%).
States where businesses are most likely to report negative effects from changing interest rates
| Rank | State | % of businesses reporting negative effects |
|---|---|---|
| 1 | South Carolina | 40.0% |
| 2 | Oregon | 39.7% |
| 3 | Utah | 39.6% |
| 4 | Idaho | 37.9% |
| 5 | Georgia | 37.8% |
Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents were asked to consider the past six months.
High interest rates and other economic challenges affected Oregon’s existing companies and hampered the efforts of new business owners in the state. According to Oregon’s Office of Small Business Assistance, Oregon startups slowed in 2023.
Echoing national trends, decreased profitably is the top negative impact on companies in the state — 34.1% of Oregon businesses report a decrease in profits due to changing rates.
| How changing interest rates negatively affect Oregon businesses |
|---|
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Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents, who could select multiple negative impacts, were asked to consider the past six months.
Despite the negative impacts of interest rate increases, Utah businesses are thriving in other areas. According to Utah’s Department of Workforce Services, job growth in the state has been about 2% over the past year, and the state’s unemployment rate in March (2.8%) was below the national rate (3.8%).
The top negative effect Utah businesses feel from rate changes is decreased profitability (34.5%).
| How changing interest rates negatively affect Utah businesses |
|---|
|
Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents, who could select multiple negative impacts, were asked to consider the past six months.
District of Columbia businesses least likely to report negative effects
On the other end of the spectrum, some states (and the District of Columbia) stand out for experiencing a minor impact from increasing rates compared to others.
Only 11.2% of businesses in D.C. report adverse effects from interest rates. The area’s small businesses have a wealth of resources to draw from, including business incubators, accelerators and capital investors, which likely provides some companies with insulation against the effects of elevated rates.
States where businesses are least likely to report negative effects from changing interest rates
| Rank | State | % of businesses reporting negative effects |
|---|---|---|
| 1 | District of Columbia | 11.2% |
| 2 | Alaska | 22.2% |
| 3 | Maine | 27.1% |
| 4 | Wyoming | 27.2% |
| 5 | Hawaii | 27.5% |
Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents were asked to consider the past six months.
Alaska and Maine businesses are also less likely to report adverse effects, with 22.2% and 27.1% of companies citing negative impacts, respectively.
In Alaska, decreased profitability is the top negative effect businesses experience but at a much lower rate than national figures — 20.6% versus 28.4%.
Similarly, 20.8% of Maine business owners say they face decreased profitability, while 9.5% of companies cite an inability to invest in their business.
Full rankings
States where businesses are most/least likely to report negative effects from changing interest rates
| Rank | State | % of businesses reporting negative effects |
|---|---|---|
| 1 | South Carolina | 40.0% |
| 2 | Oregon | 39.7% |
| 3 | Utah | 39.6% |
| 4 | Idaho | 37.9% |
| 5 | Georgia | 37.8% |
| 6 | Texas | 37.7% |
| 7 | Ohio | 37.6% |
| 8 | South Dakota | 37.3% |
| 9 | Nebraska | 37.0% |
| 10 | Illinois | 36.5% |
| 11 | Minnesota | 36.3% |
| 12 | Arizona | 36.2% |
| 13 | Iowa | 35.9% |
| 13 | Virginia | 35.9% |
| 15 | Tennessee | 35.7% |
| 16 | Louisiana | 34.8% |
| 17 | Delaware | 34.7% |
| 18 | Nevada | 34.6% |
| 18 | Pennsylvania | 34.6% |
| 20 | California | 34.4% |
| 21 | Wisconsin | 34.1% |
| 22 | Alabama | 34.0% |
| 23 | Indiana | 33.9% |
| 24 | North Carolina | 33.8% |
| 25 | Florida | 33.7% |
| 26 | Michigan | 33.4% |
| 27 | Colorado | 33.0% |
| 28 | North Dakota | 32.4% |
| 28 | New Mexico | 32.4% |
| 28 | West Virginia | 32.4% |
| 31 | Montana | 32.3% |
| 31 | Washington | 32.3% |
| 33 | Oklahoma | 32.2% |
| 34 | Maryland | 32.1% |
| 35 | Missouri | 32.0% |
| 36 | Mississippi | 31.8% |
| 37 | Vermont | 31.6% |
| 38 | Kentucky | 31.4% |
| 39 | Arkansas | 31.3% |
| 40 | New York | 30.7% |
| 41 | New Jersey | 30.6% |
| 42 | Rhode Island | 30.5% |
| 43 | Kansas | 30.0% |
| 44 | Massachusetts | 28.4% |
| 44 | New Hampshire | 28.4% |
| 46 | Connecticut | 27.6% |
| 47 | Hawaii | 27.5% |
| 48 | Wyoming | 27.2% |
| 49 | Maine | 27.1% |
| 50 | Alaska | 22.2% |
| 51 | District of Columbia | 11.2% |
Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents were asked to consider the past six months.
3 in 10 businesses say their current performance is above average
Even though business owners are navigating various challenges amid elevated interest rates, many express a favorable outlook on their current performance and optimism about the future. In fact, 30.0% of businesses report their current performance is either above average or excellent, while 30.1% say they expect their business performance to be above average or excellent in the next six months.
How businesses rate their current performance
| Performance rating | % of businesses |
|---|---|
| Excellent | 10.3% |
| Above average | 19.7% |
| Average | 47.7% |
| Below average | 16.4% |
| Poor | 5.9% |
Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024.
These rates are lower than those from September 2023, when 35.3% of businesses said their current performance was above average or excellent, and 31.5% said they expected their performance to be above average or excellent in the coming six months.
How businesses expect to perform in 6 months
| Performance rating | % of businesses |
|---|---|
| Excellent | 7.9% |
| Above average | 22.2% |
| Average | 51.9% |
| Below average | 13.2% |
| Poor | 4.8% |
Source: LendingTree analysis of U.S. Census Bureau BTOS data collected in March 2024. Note: Respondents were asked to consider their performance six months from the survey period.
There’s even optimism among businesses that aren’t faring well — 22.3% of business owners say their current performance is below average or poor, but only 18.0% say they expect their business to perform below average or poorly in the next six months.
“It’s been a tough couple of years for businesses. However, many of those that have survived understandably feel good about the future,” Schulz says. “While nothing is guaranteed, there’s reason to believe that the worst may be behind them when it comes to interest rates and that in the next six months, rates may even start to fall.”
Additionally, since about 3 in 4 businesses (77.6%) are either seeing sustained demand or an increase amid an uptick in consumer spending, they likely expect profits to bounce back when interest rates drop.
Maintaining a small business with current interest rates: Top expert tips
“Even in the best of times, running a business profitably is a challenge,” says Schulz, the author of “Ask Questions, Save Money, Make More: How to Take Control of Your Financial Life.” “In times like these, however, the difficulty grows exponentially.” Despite the obstacles, businesses can implement strategies to navigate elevated interest rates.
- Leverage available resources. Being resourceful in a high-rate environment is crucial to sustaining a business. Many national, state and local resources are available, ranging from funding sources to mentoring to networking. Seeking available resources and leveraging them can make a difference in helping your business stay afloat. “It could mean seeking help in the form of government assistance or guidance from organizations whose mission is to help small businesses,” Schulz says.
- Be flexible and innovative. “Pivoting, adjusting and course-correcting is essential to any business,” Schulz says. While it can be daunting to make changes, being open to creative solutions and new opportunities will increase your business’s chance of survival during interest rate spikes.
- Manage existing debt and cash flow. If possible, refinance or pay down business loans to decrease the impact of increased borrowing costs, particularly variable-rate debt that shifts along with rising interest rates. If paying down debt isn’t possible, consider renegotiating terms or requesting an extension. In addition to addressing your debt, assess your current cash flow. “Maybe that means dialing back expenses or holding off on expansion plans,” Schulz says. “Perhaps that means raising prices.”
- Assess current offerings and systems. To retain profits, review the average revenue and costs across all your products and services. If necessary, streamline your offerings or adjust your pricing to ensure all your products and services produce a profit.
- Focus on customer relationships. Prioritizing customer experience is critical in a high-rate climate. Assess your customer experience and take steps to nurture existing customers by improving customer service, personalizing offerings or creating loyalty programs. Additionally, increase efforts to acquire new customers through strategic marketing.
Methodology
LendingTree analyzed data from the latest (at the time of research) U.S. Census Bureau Business Trends and Outlook Survey (BTOS), conducted between March 11 and 24, 2024. We sometimes compared this to the survey fielded from Sept. 11 to 24, 2023.
Specifically, researchers ranked the states from highest to lowest based on the percentage of businesses that reported interest rate changes negatively affected them.