Tag: business news

Two companies have luxury trains called the ‘Orient Express.’ Here are the differences

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The “Orient Express” has been called the “king of trains” and the “train of kings.”

Royalty, writers, actors and spies have ridden the original route between Paris and Istanbul, which started in the late 19th century.

Author Agatha Christie described the Orient Express as “the train of my dreams.” She set a bestselling murder mystery novel on its carriages, and fictional spy James Bond rode it in the movie “From Russia With Love.”

Travelers might think of the Orient Express as a single luxurious train, but there have in fact been quite a few over the years, with many routes and owners.

Soon, people will be able to choose to take a ride on several trains using the Orient Express moniker, by two competing companies, the LVMH-owned luxury travel company Belmond and the French hospitality multinational Accor.

Both have original carriages which date to the late 1800s. But they differ in how they’re designed, where they travel and how long they’ve been in operation — one for decades and the other set to launch in 2024.

History behind the ‘Orient Express’

The original train was conceived by a young Belgian engineer named Georges Nagelmackers, who was inspired by the Pullman sleeper trains he rode during a trip to the United States in 1868.

Nagelmackers wanted to build something similar — but more luxurious — for upmarket passengers in Europe. In 1883, the “Train Express d’Orient” made its first journey out of the Gare de Strasbourg in Paris (now the Gare de l’Est) to Vienna.

The Venice Simplon-Orient-Express will launch eight new suites in June 2023.

Belmond

A few years later, the train was renamed the Orient Express and began traveling to Istanbul, then known as Constantinople. Travelers flocked to the train’s modern technology and luxurious silver cutlery and silk sheets.

Soon, Nagelmackers’ firm started to build more upscale trains for other European routes, including one that ran through the then-new Simplon Tunnel, which connects Switzerland to Italy, as well as the “Arlberg-Orient-Express,” operating between Calais, France, and Budapest, Hungary.

By the 1970s, the original Orient Express trains had made their last journeys, and the carriages fell into disrepair.

But in the 1980s, two businessmen undertook separate endeavors to revive them.

James Sherwood, an American, spent a reported $31 million acquiring and restoring enough carriages to form the “Venice Simplon-Orient-Express,” now owned by Belmond. (To add to the confusion, Sherwood also added hotels to his travel group, calling them Orient-Express Hotels. He renamed the company to Belmond in 2014.)

Swiss tour operator Albert Glatt began a service between Zurich and Istanbul, known as the “Nostalgie-Istanbul-Orient-Express,” which is now owned by Accor.

The ‘Venice Simplon-Orient-Express’

The “Venice Simplon-Orient-Express” has been operating since 1982. The train is made of original restored carriages that Gary Franklin, vice president of Belmond’s trains and cruises, called “works of art.”

“This train comes imbued with so much history,” he said. “The carriages are beautiful.”

As for Accor’s plans to launch a train also called the Orient Express,” Franklin said, “We’re the ones that have been doing it for 40 years, and I think we take it as a huge compliment that people are … seeing how well we’re doing with that.”

A one-night trip on the “Venice Simplon-Orient-Express” starts from £2,920 ($3,292) per person.

Belmond

Belmond has a one-off licensing deal to use the Orient Express name on its Venice Simplon train, Franklin confirmed, while Accor has the rights to the brand as a whole.

The “Venice Simplon-Orient-Express” will operate winter journeys for the first time this December, visiting Paris, Venice, Vienna and Florence, encouraging guests to visit the Christmas markets in those cities.

And next June, new suites are opening on the train, which come with private bathrooms, a steward, kimonos and slippers.

A one-night journey will cost from £5,500 ($6,135) per person in the new suites, which are one step below the train’s most luxurious category — the Grand Suites — which come with private dining, heated floors and “free-flowing” champagne, according to the website.

A suite on the “Venice Simplon-Orient-Express.”

Belmond

Tickets for around half of the new suites have already been bought, and Grand Suites (about $9,600 per night) are almost sold out, Franklin said.

The ‘Nostalgie-Istanbul-Orient-Express’

A few years after Glatt put his train back on the rails, it was again left derelict.

Fast forward to 2015 and French rail company SNCF — which then owned the rights to the Orient Express name — commissioned researcher Arthur Mettetal to find the train.

“We had a beautiful brand, but no cars,” Guillaume de Saint Lager, now vice president of Orient Express at Accor, told CNBC. “We knew there was this complete train, but we didn’t know where it was.”

Using Google Maps and Google 3D, Mettetal located 17 of the original cars on the Poland-Belarus border.

Carriages from the “Nostalgie-Istanbul-Orient-Express,” found derelict on the Poland-Belarus border, are being restored by the French hotel group Accor.

Maxime d’Angeac | Martin Darzacq | Accor

The bar car on the “Nostalgie-Istanbul-Orient-Express” will feature a bar with a glass counter, a tribute to French designer Rene Lalique.

Maxime d’Angeac | Martin Darzacq | Accor

Much of the interior — including original marquetry, or decorated wood — was intact, said de Saint Lager.

A detailed restoration is now underway, with architect Maxime d’Angeac hired to design the interiors. His brief was to “have a kind of fantasy of what could be Art Deco,” d’Angeac told CNBC by phone. He said he had a significant collection of the train’s original drawings and models.

Original glass Lalique lamps, in the shape of a flower, will light the train’s corridors, while other original elements from the rediscovered train will also be incorporated, such as suitcase racks and door handles.

A corridor on the “Nostalgie-Istanbul-Orient-Express” features original glass Lalique flower lamps.

Maxime d’Angeac | Martin Darzacq | Accor

The bar car will feature call buttons for champagne and service, while the dining car will have a mirrored ceiling as well as a glass wall to the kitchen, so guests can see the chef.

Sleeping suites will feature leather walls, embroidered headboards and en suite marble bathrooms. De Saint Lager described it as a “cruise train,” where guests can alight at lesser-known places (routes and prices are yet to be announced).

Passengers will soon be able to stay at “Orient Express” hotels, too, the first of which will launch in Rome in 2024, according to Accor’s website.

The Orient Express ‘La Dolce Vita’

Accor has more plans to use the Orient Express name. It’s also developing six “La Dolce Vita” trains that will run through 14 regions in Italy as well as neighboring countries, with aims to have 10 Orient Express hotels by 2030.

A rendering of the “Orient Express La Dolce Vita,” which will connect Rome to cities like Paris, Istanbul and Split.

Dimorestudio | Accor

These trains will pay tribute to an era different from the Venice Simplon or the Nostalgie-Istanbul trains.

“La Dolce Vita” — which translates as “the sweet life” — refers to Federico Fellini’s 1960 movie, as well as to a sense of Italian glamour and pleasure. The trains are designed to embody “the Italian art of living and all its beautiful traditions,” according to an online post by interiors company Dimorestudio, which is working on the project.

The trains will have 18 suites, 12 deluxe cabins and an “honour suite.” Most will leave from Rome’s Termini station, where passengers will have access to a lounge before departure, and will travel around 16,000 kilometers (about 10,000 miles) of railway lines, with stops at lesser-known Italian destinations.

A rendering of a bedroom suite on the “Orient Express La Dolce Vita,” showing the train’s 1960s-style decor.

Dimorestudio | Accor

Along with the Orient Express La Minerva Hotel in Rome, Accor will also open the Orient Express Venice Hotel in 2024 in a restored palace. In addition, Accor has plans to launch an Orient Express hotel in Riyadh, Saudi Arabia.

Those trains are also set to be launched in 2024, according to a company representative.

— CNBC’s Monica Pitrelli contributed to this report.



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‘We’re alive and kicking’: CEO of banking app Dave wants to dispel doubts after this year’s 97% stock plunge

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Mobile banking app provider Dave has enough cash to survive the current downturn for fintech firms and reach profitability a year from now, according to CEO Jason Wilk.

The Los Angeles-based company got caught up in the waves rocking the world of money-losing growth companies this year after it went public in January. But Dave is not capsizing, despite a staggering 97% decline in its shares through Nov. 18, Wilk said.

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Shares jumped as much as 13% on Monday and closed 7.9% higher.

“We’re trying to dispel the myth of, ‘Hey, this company does not have enough money to make it through,'” Wilk said. “We think that couldn’t be further from the truth.”

Few companies embody fintech’s rise and fall as much as Dave, one of the better-known members of a new breed of digital banking providers taking on the likes of JPMorgan Chase and Wells Fargo. Co-founded by Wilk in 2016, the company had celebrity backers and millions of users of its app, which targets a demographic ignored by mainstream banks and relies on subscriptions and tips instead of overdraft fees.

Dave’s market capitalization soared to $5.7 billion in February before collapsing as the Federal Reserve began its most aggressive series of rate increases in decades. The moves forced an abrupt shift in investor preference to profits over the previous growth-at-any cost mandate and has rivals, including bigger fintech Chime, staying private for longer to avoid Dave’s fate.

“If you told me that only a few months later, we’d be worth $100 million, I wouldn’t have believed you,” Wilk said. “It’s tough to see your stock price represent such a low amount and its distance from what it would be as a private company.”

Employee comp

The shift in fortunes, which hit most of the companies that took the special purpose acquisition company route to going public recently, has turned his job into a “pressure cooker,” Wilk said. That’s at least partly because it has cratered the stock compensation of Dave’s 300 or so employees, Wilk said.

In response, Wilk has accelerated plans to hit profitability by lowering customer acquisition costs while giving users new ways to earn money on side gigs including paid surveys.

The company said earlier this month that third-quarter active users jumped 18% and loans on its cash advance product rose 25% to $757 million. While revenue climbed 41% to $56.8 million, the company’s losses widened to $47.5 million from $7.9 million a year earlier.

Dave has $225 million in cash and short-term holdings as of Sept. 30, which Wilk says is enough to fund operations until they are generating profits.

“We expect one more year of burn and we should be able to become run-rate profitable probably at the end of next year,” Wilk said.

Investor skepticism

Still, despite a recent rally in beaten-down companies spurred by signs that inflation is easing, investors don’t yet appear to be convinced about Dave’s prospects.

“Investors haven’t jumped back into fintech more broadly yet,” Devin Ryan, director of fintech research at JMP Securities, said in an email. “In a higher interest rate backdrop where the cost of capital has been materially raised, we don’t see any abatement in investors challenging companies toward operating at cash profitability … or at the very least, demonstrating a clear and credible path toward that.”

Among investors’ concerns are that one of Dave’s main products are short-term loans; those could result in rising losses if a recession hits next year, which is the expectation of many forecasters.

“One of the things we need to keep proving is that these are small loans that people use for gas and groceries, and because of that, our default rates just consistently stayed very low,” he said. Dave can get repaid even if users lose their jobs, he said, by tapping unemployment payments.

Investors and bankers expect a wave of consolidation among fintech startups and smaller public companies to begin next year as companies run out of funding and are forced to sell themselves or shut down. This year, UBS backed out of its deal to acquire Wealthfront and fintech firms including Stripe have laid off hundreds of workers.

“We’ve got to get through this winter and prove we have enough money to make it and still grow,” Wilk said. “We’re alive and kicking, and we’re still out here doing innovative stuff.”



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The big new Exxon Mobil climate change deal that got an assist from Joe Biden

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Could it be that Big Oil’s next big thing got a big assist from Joe Biden?

Maybe, if carbon capture and storage is indeed as big a deal as ExxonMobil’s first-of-its-kind deal to extract, transport and store carbon from other companies’ factories implies.

The deal, announced last month, calls for ExxonMobil to capture carbon emitted by CF Industries‘ ammonia factory in Donaldsonville, La., and transport it to underground storage using pipelines owned by Enlink Midstream. Set to start up in 2025, the deal is meant to herald a new stage in dealing with carbon produced by manufacturers, and is the latest step in ExxonMobil’s often-tense dialogue with investors who want oil companies to slash emissions.

The Inflation Reduction Act, passed in August, may determine whether deals like Exxon’s become a trend. The law expands tax credits for capturing carbon from industrial uses in a bid to offset the high up-front costs of plans to capture carbon from places like CF’s plant, as other tax credits in the law lower costs of renewable power and electric cars. 

The Inflation Reduction Act and Big Oil

The law may help oil companies like ExxonMobil build profitable businesses to replace some of the revenue and profit they’ll lose as EVs proliferate. Though the company isn’t sharing financial projections, it has committed to investing $15 billion in CCS by 2027 and ExxonMobil Low-Carbon Solutions president Dan Ammann says it may invest more.

“We see a big business opportunity here,” Ammann told CNBC’s David Faber. “We’re seeing interest from companies across a whole range of industries, a whole range of sectors, a whole range of geographies.”

The deal calls for ExxonMobil to capture and remove 2 million metric tons of carbon dioxide yearly from CF’s factory, equivalent to replacing 700,000 gasoline-powered vehicles with electric versions. 

Each company involved is pursuing its own version of the low-carbon industrial economy. CF wants to produce more carbon-free blue ammonia, a process that often involves extracting ammonia’s components from carbon-laden fossil fuels. Enlink hopes to become a kind of railroad for captured CO2 emissions, calling itself the would-be “CO2 transportation provider of choice” for an industrial corridor laden with refineries and chemical plants. 

An industrial facility on the Houston Ship Channel where Exxon Mobil is proposing a carbon capture and sequestration network. Between this industry-wide plan and its first deal for another company’s CCS needs, ExxonMobil is hoping that its low-carbon business quickly scales to a legitimate source of revenue and profit.

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Exxon itself wants to develop carbon capture as a new business, Amman said, pointing to a “very big backlog of similar projects,” part of the company’s pledge to remove as much carbon from the atmosphere as Exxon itself emits by 2050.  

“We want oil companies to be active participants in carbon reduction,” said Julio Friedmann, a deputy assistant energy secretary under President Obama and chief scientist at Carbon Direct in New York. “It’s my expectation that this can become a flagship project.”

The key to the sudden flurry of activity is the Inflation Reduction Act.

“It’s a really good example of the intersection of good policy coming together with business and the innovation that can happen on the business side to tackle the big problem of emissions and the big problem of climate change,” Ammann said. “The interest we are seeing, the backlog, are all confirming this is starting to move and starting to move quickly.”

The law increased an existing tax credit for carbon capture to $85 a ton from $45, Goldman said, which will save the Exxon/CF/Enlink project as much as $80 million a year. Credits for captured carbon used underground to enhance production of more fossil fuels are lower, at $60 per ton.

“Carbon capture is a big boys’ game,” said Peter McNally, global sector lead for industrial, materials and energy research at consulting firm Third Bridge. “These are billion-dollar projects. It’s big companies capturing large amounts of carbon. And big oil and gas companies are where the expertise is.” 

Goldman Sachs, and environmentalists, are skeptical

A Goldman Sachs team led by analyst Brian Singer called the law “transformative” for climate reduction technologies including battery storage and clean hydrogen. But its analysis is less bullish when it comes to the impact on carbon capture projects like Exxon’s, with Singer expecting more modest gains as the law accelerates development in longer-term projects. To speed up investment more, companies must build CCS systems at greater scale and invent more efficient carbon-extraction chemistry, the Goldman team said.

Industrial uses are the third-largest source of greenhouse gas emissions in the U.S., according to the EPA. That’s narrowly behind both electricity production and transportation. Emissions reduction in industrial uses is considered more expensive and difficult than in either power generation or car and truck transport. Industry is the focus for CCS because utilities and vehicle makers are looking first to other technologies to cut emissions.

Almost 20 percent of U.S. electricity last year came from renewable sources that replace coal and natural gas and another 19 percent came from carbon-free nuclear power, according to government data. Renewables’ share is rising rapidly in 2022, according to interim Energy Department reports, and the IRA also expands tax credits for wind and solar power. Most airlines plan to reduce their carbon footprint by switching to biofuels over the next decade.

More oil and chemical companies seem likely to get on the carbon capture bandwagon first. In May, British oil giant BP and petrochemical maker Linde announced a plan to capture 15 million tons of carbon annually at Linde’s plants in Greater Houston. Linde wants to expand its sales of low-carbon hydrogen, which is usually made by mixing natural gas with steam and a chemical catalyst. In March, Oxy announced a deal with a unit of timber producer Weyerhauser. Oxy won the rights to store carbon underneath 30,000 acres of Weyerhauser’s forest land, even as it continues to grow trees on the surface, with both companies prepared to expand to other sites over time.

Still, environmentalists remain skeptical of CCS.

Tax credits may cut the cost of CCS to companies, but taxpayers still foot the bill for what remains a “boondoggle,” said Carroll Muffett, CEO of the Center for International Environmental Law in Washington. The biggest part of industrial emissions comes from the electricity that factories use, and factory owners should reduce that part of their carbon footprint with renewable power as a top priority, he said.

“It makes no economic sense at the highest levels, and the IRA doesn’t change that,” Muffett said. “It just changes who takes the risk.” 

Friedman countered by saying economies of scale and technical innovations will trim costs, and that CCS can reduce carbon emissions by as much as 10 percent over time.

“It’s a rather robust number,” Friedmann said. “And it’s about things you can’t easily address any other way.” 



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Buyers need a six-figure income to afford a ‘typical’ home, report finds. Here’s how to reduce the cost

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It’s no secret that it’s a tough market for prospective home buyers.

In October, U.S. buyers needed to earn $107,281 to afford the median monthly mortgage payment of $2,682 for a “typical home,” Redfin reported this week. 

That’s 45.6% higher than the $73,668 yearly income needed to cover the median mortgage payment 12 months ago, the report finds.

The primary reason is rising mortgage interest rates, said Melissa Cohn, regional vice president at William Raveis Mortgage. “The bottom line is mortgage rates have more than doubled since the beginning of the year,” she said.

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Despite the sharp drop reported this week, the average interest rate for a 30-year fixed-rate mortgage of $647,200 or less was hovering below 7%, compared to under 3.50% at the beginning of January.

And while home values have softened in some markets, the average sales price is up from one year ago.

“Home prices have gone up substantially, mortgage rates have more than doubled and that’s just crushing affordability,” said Keith Gumbinger, vice president of mortgage website HSH.

Meanwhile, a higher cost of living is still cutting into Americans’ budgets, with annual inflation at 7.7% in October.

How to make your mortgage more affordable 

While the current conditions may feel bleak for buyers, experts say there are a few ways to reduce your monthly mortgage payment.

For example, a higher down payment means a smaller mortgage and lower monthly payments, Gumbinger explained. “More down in this sort of environment can definitely play a role in getting your mortgage cost under control,” he said.

Another option is an adjustable-rate mortgage, or ARM, which offers a lower initial interest rate compared to a fixed-rate mortgage. The rate later adjusts at a predetermined intervals to the market rate at that time.

An ARM may also be worth considering, as long as you understand the risks, Cohn said.

If you’re planning to stay in the home for several years, there’s a risk you won’t be able to refinance to a fixed-rate mortgage before the ARM adjusts, she said. And in a rising rate environment, it’s likely to adjust higher.

Your eligibility for a future refinance can change if your income declines or your home value drops. “That’s a greater risk, especially for a first-time homebuyer,” Cohn said.

Of course, home values and demand vary by location, which affects affordability, Gumbinger said. “Being patient and being opportunistic is a good strategy for market conditions like this,” he said.



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3 takeaways from our daily meeting: Looking for new stocks, 2 trades, earnings recap

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Federal Reserve’s increasing interest rate hikes put Main Street economy ‘dangerously close’ to edge of lending cliff

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Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a two-day meeting of the Federal Open Market Committee (FOMC) in Washington, July 27, 2022.

Elizabeth Frantz | Reuters

The Federal Reserve’s decision to raise interest rates by three-quarters of a percentage point, or 75 basis points, for the third-consecutive time at the Federal Open Market Committee meeting, is a step being taken to cool the economy and bring down inflation, but it is also putting small business owners across the country in a lending fix they have not experienced since the 1990s.

If the Federal Reserve’s FOMC next moves match the market’s expectation for two more interest rate hikes by the end of the year, small business loans will reach at least 9%, maybe higher, and that will bring business owners to a difficult set of decisions. Businesses are healthy today, especially those in the rebounding services sector, and credit performance remains good throughout the small business community, according to lenders, but the Fed’s more aggressive turn against inflation will lead more business owners to think twice about taking out new debt for expansion.

Partly, it is psychological: with many business owners never having operated in anything but a low interest rate environment, the sticker shock on debt stands out more even if their business cash flow remains healthy enough to cover the monthly repayment. But there will also be more businesses finding it harder to make cash flow match monthly repayment at a time of high inflation across all of their other business costs, including goods, labor, and transportation.

“Demand for lending hasn’t changed yet, but we’re getting dangerously close to where people will start to second guess,” said Chris Hurn, the founder and CEO of Fountainhead, which specializes in small business lending.

“We’re not there yet,” he said. “But we’re closer.”

Increasing interest cost

As traditional banks and credit unions tighten lending standards and businesses begin to breach debt covenants based on debt service coverage ratios — the amount of cash flow needed to cover debt — more business owners will turn to the SBA loan market in which firms like Hurn’s specialize.

“Every time we get into one of these cycles and the economy is slowing and rates are going up, one of the few places to get business credit is SBA lenders,” he said.

But even in the SBA market, business owners are beginning to pause as a result of the Fed’s rate actions, said Rohit Arora, co-founder and CEO of Biz2Credit, which also focuses on small business lending. “From a credit perspective, people are getting more cognizant about increasing interest cost, and that the Fed will keep interest rates at 4-4.50%,” Arora said.

Fed officials signaled the intention on Wednesday of continuing to hike until the funds level hits a “terminal rate,” or end point of 4.6% in 2023.

“Even a month ago, this was a ‘2022 phenomenon’ and now they will have to live with the pain for longer,” Arora said. “It’s a harder decision now because you don’t have the Fed ‘put’ behind you,” he added, referring to an environment in which you could bank on adjustable loan rates not going higher.

Fed expected to keep rates higher for longer

The big change since the summer, reflected in the stock market as well, is the acknowledgment that the Fed is not likely to quickly reverse its interest rate hikes, as inflation proves stickier than previously forecast, and key areas of the economy, like the labor market, don’t cool fast enough. As recently as the last FOMC meeting in July, many economists, traders and business owners expected the Fed to be cutting rates as soon as early 2023.

Now, according to CNBC’s surveying of economists and investment managers, the Fed is likely to reach peak rates above 4% and hold rates there throughout 2023. This outlook implies at least two more rate hikes in November and December, for a total of at least 75 basis points more, and including Wednesday’s hike, 150 basis points in all from September through the end of the year. And that is a big change for business owners.

The FOMC meeting decision reinforced this expectation of a more hawkish Fed, with the two-year treasury bond yield hitting its highest rate since 2007 and the central bank’s expectations for when it starts cutting rates again pushed out even further in time. In 2025, the fed funds rate median target is 2.9%, implying restrictive Fed policy into 2025.

How SBA loans work and why rate hikes are a big issue

SBA loans are floating rate loans, meaning they re-adjust based on changes in the prime rate, and that has not been an issue for business owners during the low interest rate environment, but it is suddenly becoming a prominent concern. With SBA loans based on the prime rate, currently at 5.50%, the interest rates are already between 7%-8%. With the prime rate poised to reach 6.25% after the Fed’s latest 75 basis point hike, SBA loans are heading to as high as the 9%-9.5% range.

“Most of the business owners today, because they have lived in such a low rate environment, while they have floating interest rate loans they didn’t even realize that on existing loans it could go up,” Arora said. “Everyone expected with gas prices coming down to what I would call ‘pre-high inflation levels’ that things looked a lot better. Now people are realizing that oil prices don’t solve the problem and that’s new for lots of business owners who thought inflation would taper off and the Fed not be so hawkish.”

He stressed, like Hurn, that demand for business loans is still healthy, and unlike deteriorating consumer credit, small business credit performance is still strong because many firms were underleveraged pre-Covid and then supported by the multiple government programs during the pandemic, including the PPP and SBA EIDL loans. “They are well capitalized and are seeing strong growth because the economy is still doing pretty well,” Arora said, and he added that the majority of small businesses are in the service economy, which is the strongest part of the economy right now.

But many business owners were waiting for the Fed to cut in early 2023 before making new loan decisions. Now, they’ve been caught flatfooted by adjustable loan rates that went up, and an interest rate environment poised to go higher still.

“Lots of business owners look at gas prices first and that was true for most of the year, and now it’s broken down. Wage inflation and rent inflation are running amok, so we’re not seeing inflation coming down anytime soon,” Arora said.

That’s leading to more interest in fixed-rate products.

Fixed versus adjustable rate debt

Demand for fixed-rate loans is going up because businesses can lock in rates, from a year to three years. “Though it’s pretty late to the game, they feel like maybe the next 14 to 15 months, before rates start coming down, they can at least lock in a rate,” Arora said. “The expectation is, in the short term, SBA loans will adjust up and non-SBA loans are shorter tenure,” he said.

SBA loans range from three years to as long as 10 years.

A fixed rate loan, even if it is a little higher than an SBA loan today, may be the better option given the change in interest rate outlook. But there’s considerable potential downside. Trying to time the Fed’s policy has proven difficult. The change from the summer to now is proof of that. So if there is a significant recession and the Fed starts cutting rates earlier than the current expectation, then the fixed-rate loan becomes more expensive and getting out of it, though an option, would entail prepayment penalties.

“That’s the one big risk you run if taking a fixed-rate loan in this environment,” Arora said.

The other tradeoff in choosing a fixed-rate loan: the shorter duration means a higher monthly repayment amount. The amount a business can afford to pay back every month depends on the amount of income coming in, and a fixed rate loan with a higher monthly repayment amount requires a business to have more income to devote to servicing the loan.

“After 2008, business owners never experienced a jumped in SBA loans and now they see monthly interest payments increasing, and are feeling the pinch and starting to plan for it … get adjusted to the new reality,” Arora said. “Demand is still healthy but they are worried about the increased interest cost while they are still battling inflation, even as lower oil prices have helped them.”

SBA loan guaranty waiver ending

Another cost that is suddenly influencing the SBA loan decision is the end of a waiver this month on SBA loan guaranty fees that are traditionally charged to borrowers so that in the event of a default, the SBA pays the portion of the loan that was guaranteed.

With that waiver ending in September, the cost of guaranteeing a loan can be significant. For example, a 3% SBA guaranty fee on a $500,000 loan would cost the business borrowing the money $15,000.

“It’s adding to the costs,” Arora said.

It’s still a mistake to wait too long to access credit

While oil prices are coming down, food and other inventory costs remain high, as do rent and labor costs, and that means the need for working capital isn’t changing. And business owners who have been through downturns before know that the time to access credit is before the economy and cash flow start to deteriorate. At some point, in the most severe downturns, “you won’t get money at any cost,” Arora said.

“If you have a reasonably calculated growth plan, no one is going to say keep your head in the sand and wait until Q2 of next year and see where rates are,” Hurn said. “Banks don’t like to lend when the economy is slowing and there are higher rates, which translate to higher risk of defaults.”

Hurn said loan covenants are being “tripped” more frequently now in deteriorating sectors of the economy, though that by no means typifies the credit profile on Main Street.

“Once interest rates go up, and if inflation does not go down, we will see more debt service coverage ratios getting violated,” Arora said. This has to be taken into account because here is a lag between Fed policy decisions and economic impact, and this implies that sticker forms of inflation will last for longer even as sectors like housing and construction are deteriorating.

Much of the surplus liquidity businesses are sitting on due to government support is being eroded, even amid healthy customer demand, because of high inflation. And even if this economic downturn may not be anything like the severe liquidity crisis of 2008, business owners are in a better position when they have the access to credit before the economic situation spirals.

This is not 2008, or 1998

The systemic issues in the financial sector, and the liquidity crisis, were much bigger in 2008. Today, unemployment is much lower, lender balance sheets are much stronger, and corporate balance sheets are stronger too.

“We’re just running into a slowing economy,” Hurn said.

When he started in small business lending back in 1998, business loans reached as high as 12% to 12.5%. But telling a business owner that today, like telling a mortgage borrower that rates used to be much higher, doesn’t help after an artificially low interest rate era.

“Psychologically, people set their expectations for borrowing costs … ‘they will be this cheap forever,'” Hurn said. “It’s changing radically now.”

“If rates go close to 10%, psychologically, businesses will start hesitating to borrow,” Arora said.  

And with a peak Fed rate level of 4% or higher reached by late this year, that is where SBA loan rates are heading.

The problem of higher interest rates and recession

Another 150-175 basis points in total from the Fed, if it has its intended effect of bringing inflation down, would leave many businesses in a stable condition because all of the other costs they are facing outside of debt would be more manageable. But the key question is how quickly the interest rate actions bring down inflation, because the higher rates will impact the cash flow of businesses and their monthly loan payments.

Lower inflation in stickier parts of the economy, like labor, combined with energy costs remaining lower, would allow small businesses to effectively manage cash flow. But if those things don’t happen as quickly as people are expecting, “then there will be pain, and consumer spending will be down too, and that will have a bigger impact,” Arora said. “The challenge is recession and high interest rates together that they have to handle and haven’t seen in 40 years,” he said.

Rates are not ordinarily considered the determining factor in a business’s decision to take out a loan. It should be the business opportunity. But rates can become a determining factor based on the monthly repayment amount, and if a business is looking at cash flow against monthly costs like payroll being harder to make, expansion may have to wait. If rates go up enough, and inflation doesn’t fall off fast enough, all borrowing may need to be applied to working capital.

One thing that won’t change, though, is that the U.S. economy is based on credit. “People will continue to borrow, but whether they can borrow at inexpensive rates, or even get capital trying to borrow form traditional sources, remains to be seen,” Hurn said.



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