The Rate Turnaround for SMEs: Investment, Valuation, and Financing

Why the rate turnaround is a different question for every owner

For over a decade, money in the euro area was almost free. Since 2022, that has changed. The European Central Bank's deposit rate, the rate banks receive for money held at the central bank, rose by four and a half percentage points within 14 months. For a business, this sounds like a question of borrowing costs. In fact, the interest rate changes three different calculations: whether an investment pays off, what your own business is worth, and how it is financed.

This article therefore asks: Where does the rate turnaround actually have a strong effect on SMEs, and where less than the headlines suggest? To answer it, we first clarify the trajectory and the thinking model of present value, then go through the three calculations, weigh two readings, and derive what an owner should check now. Interest rates and investment describes the consequences of the rate environment for selling capital goods.

How interest rates have developed since 2022

Until July 2022, the deposit rate stood at minus 0.5 percent, meaning banks paid to park money at the central bank. In September 2023, it reached 4 percent. From June 2024, the ECB cut step by step to 2 percent in June 2025, and in 2026 it raised rates again in two steps. Since September 16, 2026, the deposit rate has been 2.5 percent and the main refinancing rate 2.65 percent.

This reaches businesses with a delay and a markup. According to the Bundesbank's interest rate statistics, new variable-rate corporate loans of up to 250,000 euros cost an average of 3.93 percent in August 2026. Ferstl and Graf (2026) show for the euro area that lending to companies reaches its strongest response to monetary policy steps only after 12 to 18 months, with large differences between countries.

The thinking model: present value, or why interest is the price of time

Present value is today's value of an amount of money that will only flow in the future. Anyone who receives 100,000 euros in five years has less today, because they cannot invest the money until then. How much less is determined by the interest rate. At 1 percent, the 100,000 euros are worth about 95,000 euros today; at 5 percent, about 78,000 euros.

An everyday analogy: a voucher that can only be redeemed in five years is worth less than cash. The more one could earn with the money in the meantime, the less the voucher is worth. The interest rate is the number that sets the size of this discount.

Three effects that matter for a business follow from this simple logic. First, the present value of future savings falls, so an investment must pay off more. Second, the present value of future profits falls, so the business is mathematically worth less. Third, every financing that is newly concluded or renewed becomes more expensive. The further in the future the payments lie, the stronger the effect of the interest rate.

The rate turnaround did not just make loans more expensive. It made the future cheaper, and with it everything that only brings in money later.

First calculation: investment reacts less than expected

According to the present-value model, investment should fall markedly when interest rates rise. The findings are more restrained. Sharpe and Suarez (2021) surveyed chief financial officers in the US. Only 16 percent would have invested less with financing costs one percentage point higher, and 37 percent would not have changed at any conceivable increase. Companies often calculate with fixed hurdle rates well above market interest rates that rarely change.

In the German Mittelstand, too, interest rates do not play the main role. According to the KfW SME Panel 2026, the roughly 3.9 million small and medium-sized enterprises invested around 218 billion euros in 2025, three billion less than the year before. KfW, Germany's state development bank, names high prices, uncertain development, and bureaucracy as more important obstacles. Interest rates weigh less because of the generally good equity base.

Interest rates matter where businesses depend on loans. In 2025, according to KfW, only 10 percent of all SMEs and 25 percent of investing ones negotiated loans with banks. For this group, access matters as much as price: in the second quarter of 2026, 40.5 percent of SMEs in credit talks found their bank restrictive. How banks decide on loans discusses how banks decide on lending today.

Second calculation: the value of your own business

Interest rates have the strongest effect on a figure many owners only look at when selling or handing over: company value. A common method divides the sustainably expected profit by a capitalization rate made up of a risk-free base rate and a risk premium. If the base rate rises, the value falls, even if the business earns just as much as before.

The worked example is heavily simplified: it assumes no growth deduction, no special assets, and permanently equal profit. But it shows the principle. Two percentage points more on the capitalization rate reduce the value here by around a fifth. An owner who had a figure in mind for retirement in 2021 should recalculate it at today's rates. Frey and Heilmann (2026) also point out that capital costs do not automatically fall back to earlier levels when rates decline, because risk premiums can rise.

For buyers, the calculation works the other way around. A purchase financed by credit must carry more interest out of profit when rates are higher. If you want to acquire a business, Growth through acquisition sets out the checkpoints; if you want to hand over, see Planning your own exit.

Third calculation: financing and refinancing

Many businesses took out loans with long fixed-rate periods during the low-rate era. They only feel the turnaround when the fixed period ends. This makes the effect delayed and uneven: two businesses with the same activity can be affected very differently depending on when their financing ends.

The relationship with the bank can dampen the effect. Kuhmann (2025) analyzed euro area credit data from mid-2020 to mid-2024. Banks that specialize in certain industries or company sizes pass on monetary tightening to their preferred customers partly more weakly, in both rates and loan volumes. A long-standing house bank that knows a business is therefore more than one provider among many.

At the same time, growth ties up money that must also be financed. Growth costs liquidity describes why full order books can squeeze liquidity. Financing growth discusses which financing routes exist besides bank loans.

Two readings: a historic turning point or a return to normal?

Both readings capture something. For investment decisions, much speaks for the second: interest is one factor among several, and SMEs' equity base is generally solid. For company values and expiring financing, more speaks for the first, because long periods react strongly to interest rates mathematically.

I therefore consider the question of time horizon more important than the level of interest rates. Anyone calculating short term barely feels the turnaround. Anyone calculating far into the future, on the value of the business, on long financing, on investments with long payback, feels it all the more. After inflation discusses how price negotiations with business customers have changed in parallel.

What you can check now

From the three calculations I derive a three-line rate check. It takes an hour and needs only your latest bank documents, your investment plan, and a rough profit estimate.

1. Financing: when does which fixed rate end?

   List all loans with outstanding balance, rate, and end of the fixed-rate period. For each, calculate what refinancing at today's rate would cost per year, and talk to the bank early.

2. Investment: which hurdle rate applies?

   Check the return you use to evaluate investments. If it is still at 2021 levels, some projects are calculated too favorably.

3. Value: what would the business be worth today?

   If a sale or handover is due in the next few years, calculate your sustainable profit with today's capitalization rate. Have the figure checked by an expert before relying on it.

Conclusion: interest rates act mainly on long horizons

To the guiding question: the rate turnaround affects ongoing investment in SMEs less than the headlines suggest. There, demand, prices, uncertainty, and bureaucracy count for more, and many businesses have solid equity. It has a strong effect, however, wherever long periods are involved: on the value of a business, on expiring fixed-rate periods, and on investments that pay off only late. The present-value model explains why.

For an owner, the sober conclusion is not to keep the figures of 2021 as the yardstick. A rate of 2.5 percent is not a state of emergency but probably the framework for the coming years.

• List all loans with the end of the fixed-rate period and refinancing costs at today's rate.
• Adjust the hurdle rate for investments to today's rate level.
• If a sale or handover is planned, roughly recalculate company value at today's rates.
• Hold the refinancing conversation with the bank at least twelve months before expiry.