For Chevy Chase Chevrolet dealer Fred Bowis, with almost $3 million worth of new cars sitting on his lots, this week's jump in the prime interest rate to 14 percent was a costly move.
"The prime is just killing us," said Bowis, the outgoing president of the National Capital Area Automotive Trade Association.
Bowis said Chevy Chase Chevy pays $30,000 to $35,000 a month in interest charges on its unsold cars -- interest charges that float 3/4 of one percent above the prime rate.
If, as expected, General Motors Acceptance Corp. next week raises the interest it charges dealers for "floor planning" new cars, it will cost Bowis several hundred dollars a week.
"It's a cost we can't pass on," explained Bowis. With soaring energy costs hampering car sales and interest costs squeezing dealers further, Bowis predicts some local dealers may have to lay off employes.
Small businesses -- and the people who work for them -- will be among the chief victims of the Federal Reserve Board's new "tight money" strategy for fighting inflation.
Beacuse of the Fed's decision to raise interest rates and urge banks to limit car dealers like Bowis will have to pay higher interest charges. So will most retail store owners, home builders, gas station and fuel oil dealers and dozens of other small entrepreneurs.
The potential danger to small firms prompted Rep. Neal Smith (D-Iowa) to take the floor of the House of Representatives yesterday to urge the Federal Reserve "to devise some mechanism which would shield small businesses from bearing a disproportionate part of the burden of fighting inflation."
Small businesses, Smith said, cannot escape from soaring interest rates, because banks are their only source of funds; unlike big companies they cannot sell stocks or bonds to raise money.
Smith said he supports the Federal Reserve's decision to restrict credit to fight inflation, and like most observers is uncertain about how to cushion the effect on small companies.
One possibility, already advocated by some banks, is offering lower interest rates to smaller businesses, creating what is known as a "two-tier prime."
District of Columbia National Bank doesn't call it that , but is holding interest rates to 13 percent for well established business customers who are borrowing for expenses they cannot avoid.
D.C. National President Tom Condit explained that, like many smaller banks, that have solid savings and checking deposits, "our costs do not go up the same way that costs do for bigger banks. Therefore we are not under the same pressure to pass those costs along."
The Small Business Administration this week raised the maximum interest rate on government guaranteed loans to 15 percent -- 1/2 of one percent above prime.
SBA also opened its Economic Dislocation Loan program to all heating oil dealers, allowing them to borrow up to $100,000 through the program. Oil jobbers are expected to be among the hardest hit by the higher interest charges, because the cost of oil has nearly doubled -- forcing them to borrow more -- and oil companies have demanded quicker payment.
Retailers will also pay more to finance their inventories, but Washington shoe store owner Frank Rich said he -- and most stores -- borrowed for the fall season before rates jumped, but will still face increases in borrowing costs on spring merchandise.