What Record High Stocks Mean For The Small Business Loan Market

Stock market indices continue to hit record highs in the United States. On Nov. 8, the Down Jones Industrial Average closed at an 18.7% increase since Jan. 1. The S&P 500 and Nasdaq closed with a 23.4% and 27.7% yearly gain, respectively.

While this is a good thing for investors, what about small businesses? There is a direct correlation between the stock market and small business loans.

Interest Rates

There is a wide variation of opinions when it comes to the relationship between stocks and interest rates. However, there is a correlation that can be seen when it comes to interest rates and spending.

When interest rates go up, people tend to spend less. When they spend less, companies make less money. When they report less revenue, the price of the stock drops. As such, you can see that interest rates often ride along with the market.

Five-year rate chart showing the Federal Funds rate. Image courtesy of Macrotrends.

When markets are at their peak, interest rates will tend to rise. There are a number of reasons including government intervention (i.e., the Fed). So many times, you will see higher interest rates with small business loans when markets are having a bull run.

Many Value Stocks Are Banks

Many investors are throwing money into value name stocks. These are the stocks that trade lower than their fundamentals indicate.

Currently, many of the world’s largest banks fall into this category, including Bank of America BAC, JPMorgan Chase & Co. JPM, Citigroup C and Wells Fargo WFC. Citigroup is a perfect example as its P/E ration in June was half that of the average S&P 500 company.

This is a double-edged sword when looking for a small business loan indicator. While more people are putting money into these stocks as a show of confidence, these companies still tend to be stricter with their business dealings in order to maintain that confidence. As such, many banks are tightening their restrictions for loans.

Best Loans In Bull Markets

In this type of economy, there are several small business loans that you should be looking at: mainly conventional, SBA, and lines of credit.

If you go with a conventional loan, just make sure to lock in a fixed rate. Otherwise, you could wind up with payments you cannot make when the rate goes up thanks to the markets.

A loan guaranteed through the Small Business Administration is one way to go as the SBA sets the rates. You will never pay more than the SBA allows when they guarantee the loan. There are many qualifications for SBA loans which mean they take longer than conventional loans, but it could be worth the wait.

A business line of credit is also an option for a small business that wants immediate cash without waiting for the SBA. A line of credit can have a fixed or variable rate. If variable, you can spend when the rate is low. However, fixed will allow you to spend at any time knowing that your rate is guaranteed regardless of what the markets are doing.