Small Business Owners Paying Less in Interest Expenses These Days

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Interest ExpensesBased upon data compiled and analyzed from 1983 through 2011, the Internal Revenue Service (IRS) has found that today’s small business owners are paying less in interest expenditures on loans than did their predecessors of 30 years ago. According to the IRS study – conducted and measured in inflation-adjusted numbers – the typical small business owner in 2011 paid 4 times less than did a sole proprietor in 1983.

This is a fall from a 2.1 percent of revenues in 1983 to a 1.0 percent in 2011. The IRS data supports the conclusion that the decline in the amount of interest payments was the product of the average sole proprietorship shrinking in size and, therefore, small business spending on interest declined due to a reduction in sales. The majority of the shrinkage happened during the 1980s and 1990 with interest expense as a percentage of sale remaining constant since 2001.

The top 3 reasons for this reduction of interest expenditures:
•    A drop in the Federal Reserve prime interest rate from 10.8 percent (1983) to 3.25 (2014).
•    A drop in the number of small businesses borrowing money from 38 percent in 1986 to 31 percent in 2014.
•    The drop in the average size of business loans – the average bank loan in 1997 was 43 percent larger than the average loan in 2014 per the Federal Reserve.

Small businesses have gravitated toward equity financing over the past 3 decades and, as their interest expenses have been reduced, their percentage of proprietors’ equity has increased per data provided by the Federal Reserve – from 30.7 percent in 1980 to 68.8 percent in 2013.

Some observers note that the transition from traditional brick and mortar business to the modern realm of online and digitally-supported business, the small proprietors of today’s world require less capital investment resulting in less debt across the spectrum. The success of today’s online small businesses seem to be the logical reason behind the fall of interest expenditures over the past three decades.