- Key insight: The Federal Reserve's recent rate hike, as well as possible additional rate hikes in the future, should raise costs for small businesses.
- What's at stake: Payment fintechs say the added interest rate pressure could delay tech investments and other new initiatives.
- Expert quote: "It is important to understand the customer as consumers are also being squeezed in this inflationary environment." — Ben Johnson, Chief Operating Officer, Kapitus
Small businesses have suffered
"This isn't just a short-term situation, there will be higher costs for a long period for small businesses," Santhosh Srinivasan, vice president of treasury at Nium, a Singapore-based payments company that has operations in the U.S. told American Banker. "And a longer duration will further impair businesses."
While banks have tried to
"Small businesses were grappling with elevated inflation rates, a volatile tariff strategy including a trade war with Canada, slowing job creation, and a spike in oil and gas prices due to the war in Iran," Johnson told American Banker. "This rate increase, and the expectation that another increase is likely before the end of 2026, will push financing costs higher for small businesses which have already been grappling with higher prices and supply chain uncertainty for several years now."
Duties before interest
Before the latest rate hike, the impact of recent political events—particularly Trump's tariffs— has hurt small businesses more than the 2020 Covid-19 pandemic, according to a recent
Businesses with less than 10 employees lost 292,000 jobs in 2025, or 4.5 times more than during 2020, according to the committee. April 2026 was the 13th consecutive month of job losses at these small businesses, and revenue at construction businesses with fewer than 10 employees declined 10% between April 2025 and April 2026. Revenue at similarly sized leisure and hospitality businesses fell 15.2% during the same period.
Relatively speaking, the small size of the Fed's rate increase should have less impact than the increase in fuel costs and tariff charges that have roiled the small business economy for the past several years, according to Johnson. "However, if rates were to continue to rise throughout 2027, small businesses would feel a significant impact," he said.
The businesses most affected by higher rates will be those that borrow money to finance the daily activities of their business, including manufacturers, wholesalers, and retailers who use factoring products to finance the purchase of inventory and raw materials, according to Johnson. It also includes farmers who borrow at the beginning of the season to purchase seed, fertilizer and equipment, as well as contractors who borrow to begin a job, hire a crew and purchase raw materials.
Businesses seeking to finance new equipment, purchase real estate or finance the acquisition of a competitor will feel pressure, Johnson said.
In terms of financial and payment pressure, the increased cost of capital will make it harder to "front" liquidity to fund supply chains, according Srinivasan, adding technology investments can also be delayed as those funds go toward improving liquidity.
"It raises 'opportunity costs," Johnson said.
What can be done
Nium is addressing the problem by offering "just in time" funding options using stablecoins to speed processing. "Just in time" funding refers to transactions that are tied to real-time inventory needs, so suppliers are paid precisely when stock is needed. This reduces holding costs and other expenses tied to supply chain delays.
"Rather than trying to fund everything overnight, we're trying to fund 50% in fiat and then monitoring across our clients' corridors to do 'just in time' funding," Srinivasan said.
Johnson said small businesses operating in this challenging environment should keep a close eye on operating margins and avoid starting new projects until they have been able to determine that sufficient demand is present to justify the investment of time and capital.
"It is important to understand the customer as consumers are also being squeezed in this inflationary environment," Johnson said, adding small business owners may want to adjust product offerings to provide lower-cost and greater value offerings. "It is also important for small business owners to be sure they have financing options lined up in case they need capital to weather a drop in demand or to capitalize on an opportunity.
Nium and Kaputis are among a market of payment companies that also lend money to small businesses, including PayPal, Block and American Express. These firms have made recent
Amex, one of the small business market's largest lenders, this month released several new
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As for the demand for short-term business credit, as borrowing costs rise, overall demand for credit will likely fall, according to Eric Grover, principal at Intrepid Ventures.
"If merchants are stressed and traditional bank credit is more expensive, perhaps demand shifts to Block and PayPal who have greater visibility into merchants' daily performance and can collect from card payments," Grover told American Banker. "But it's worth bearing in mind that in a higher-rate environment their cost of capital goes up too."
