Sticker shock over higher borrowing rates isnāt limited to homebuyers and car shoppers. As rates rise, business executives wanting expansion loans may be in for a difficult conversation in those comfy leather chairs at the local bank.
As the cost to borrow goes up, businesses have to adapt quickly by recalculating expected payments.
But banks, too, have to be ānimbleā when rates rise, as one banker says, to stay competitive and not price themselves out of the lending market or force borrowers online.

Getting access to financing when you need it āis critical to the success of any business,ā says Taylor Franco, PNC senior vice president and business banking manager for Alabama, Georgia and the Florida Panhandle.
The rates banks charge business customers depend on a number of factors, including type, term and collateral, she explains. Unlike small business loans, working capital loans are generally not used for long-term investments like equipment or real estate, but rather short-term needs like rent, payroll or inventory expenses, she says.
River Bank & Trust CEO Jimmy Stubbs sees borrowing rates for all types of loans moving up in the near term.
Looking ahead 12 to 24 months, there are signs that āgive us some concern,ā says Stubbs. He noted inflation is at a 40-year high, supply chain issues are heightened because of Chinaās COVID policies, the war in Ukraine continues and the stock market is volatile.
Add to all that more expected increases this year from the Federal Reserve āthat trickle down to the banking industry,ā Stubbs says.
In pivoting to deal with changing rates, Stubbs says, ābankers live it every dayā and stress their balance sheets to evaluate the impact of a hike of 50, 100 or even 150 basis points.
Itās a complex analysis done bank by bank.

āWe donāt all get up and say today weāre going to move our rates to this point,ā Stubbs says. āYouāve got to remain competitive while at the same time youāre trying to manage your balance sheet and create the most opportunity you can relative to earning dollars.
āWhen rates are moving youāve got to be nimble and youāve got to make the necessary adjustments to maintain, if you will, the opportunity to do what weāre doing as a business, which is maximizing our shareholdersā equity,ā he says.
But they must stay competitive.
Steve Whatley, chairman and CEO of Southern States Bancshares Inc., says he doesnāt see many businesses turning to online lenders. Brick-and-mortar banks compete among themselves and emphasize service when rates are closely matched.
āWe try to sell ourselves because of the reliability and response that we give our customers and prove to them that weāre worth more,ā Whatley says. āIn the end of the analysis, though, if itās all about rates, we have to be competitive if itās a piece of business we want to put on our books.ā
Consumers can lock in mortgage rates in the short term, but Stubbs says that doesnāt happen much on the business side.
āThe predicted path of what rates are going to do is calculated intoā whatever they borrow, he says.
Bankers have to explain that renewing a line of credit simply costs more these days.
āAll of a sudden the cost of that money has gone up because rates have gone up,ā Stubbs says.
āBanking, or commercial banks in general, receive a significant source of funding off of the margin ā the difference between what we can earn on our loans and bond portfolio versus our cost of funding, which is primarily what customers put in deposits,ā Stubbs explains. āWe have to make sure that we are very flexible and nimble in changing those rates as rates move.ā
Complicating the banker/lender and business/borrower relationship during this rising rate environment is the fact that goods in general are more expensive than a couple of years ago. In 2020-21, the price of lumber alone shot up 37%, according to the National Association of Home Builders.
āAt what point in time does the consumer or businessperson say thatās too much, Iāll just get by with what I have,ā asks Stubbs. āSo far weāre really not seeing that because we continue to have inflationary pressure. The business is still attempting to grow and meet the demand expectation thatās out there.ā
Higher materials costs lead to a trickle-down effect ā but not as the classic economic principle where the wealth of a few dribbles down to the masses. This trickle brings higher prices for all and possible cooling demand.
āWhat if the end purchaser should say, āYouāve raised my price and now it costs too muchā and it has a whole domino effect. It could send us into a recession at some point in time. Right now, thatās not the case,ā says Stubbs.
Because of several years of growth, many businesses are in pretty good shape in terms of assets and cash on hand, one banker explains.

āI think businesses are sound right now,ā says Whatley of Southern States. āWeāre seeing businesses with significantly more liquidity than theyāve had in the past.ā
Higher rates, though, affect everything eventually.
āGenerally, there could be some pressure and stress put on businesses by rising interest rates. Demand could be impacted for all goods and services,ā Whatley says.
Many astute business borrowers are going with floating rate loans, he says, ābecause they donāt ā and we donāt ā expect rates to stay high for a long period of time.ā
āA rising rate environment doesnāt necessarily lead to a lack of start-up or expansion opportunities,ā says Franco. āIt remains important to consult with a banking advisor to determine whether a fixed rate or variable rate is best during the current interest rate environment.ā
The economy is already showing signs of slowdown, Whatley notes, so the central bankās rate increases are doing their job. āI think the Fed is going to get the reaction they expected by raising Fed funds over the next several months.ā
Still, rates probably wonāt come back down in the next 12 months, he predicts. āI think they may plateau out in a year. I think it all depends on the response they get out of the economy.ā
Banks, businesses and consumers all may have to accept an unpleasant new normal with regard to credit.
āWhen you look at rates historically, the rates are not high,ā says Stubbs. āThe rates just got real low and they stayed there for an extended period of time so we all got comfortable and we all got used to those rates,ā he says.
As they āsomewhat normalize,ā Stubbs says, āitās all a shock.ā
Deborah Storey is a Huntsville-based freelancer for Business Alabama.
This article appeared in the July 2022 issue of Business Alabama.