Global Pressures, Local Realities

The sharp rise in interest rates over recent years has turned business financing into a major challenge for small and medium-sized enterprises (SMBs), which form the backbone of both local and global economies. In an effort to curb inflation in the aftermath of the COVID-19 crisis, central banks adopted aggressive monetary tightening policies, rapidly reshaping the credit landscape. As loan costs soared and lending conditions tightened, business owners found themselves facing a financial dilemma: pay more, forgo funding—or shut down operations altogether.

Interest Rate Trends in Israel: From 0.1% to 4.75% in One Year

The Bank of Israel raised its benchmark interest rate sharply between April 2022 and May 2023, peaking at 4.75%—its highest level since 2006. The move was aimed at curbing inflation caused by supply chain disruptions, surging commodity prices, and extraordinary government spending. Only in the second quarter of 2025 did the trend begin to reverse, with the rate reduced to 4.25%, and later to 4.0%, as inflationary pressures began to ease.

Despite this moderation, the real interest rate remains high, making it difficult for small businesses to finance daily operations or investments. At the same time, banks have become more risk-averse, cutting back on credit limits and increasing collateral requirements.

The International Context: The Fed, ECB, and the Global Credit Market

Israel’s monetary shift did not occur in a vacuum. In the United States, the Federal Reserve hiked rates from 0.25% in early 2022 to a peak of 5.5% by July 2023. In Europe, the European Central Bank (ECB) raised its rate to 4.0%—the highest level seen in the eurozone in two decades.

Though a downward trend began in 2025 (with U.S. rates falling to 4.5% by June 2025), interest levels remain significantly higher than the pre-pandemic decade. This monetary environment also impacts commercial banks that rely on global capital markets—including in Israel—resulting in more expensive credit for domestic borrowers as well.

Direct Pressure on Small Businesses

While public and multinational corporations can raise funds through capital markets or corporate bonds, small and medium-sized businesses often depend on short-term bank loans. The sharp increase in Israel’s prime lending rate, which peaked at 6.25%, has eroded profitability across sectors such as food services, retail, tourism, and general services.

According to data from Israel’s Small and Medium Business Agency, around 38% of small businesses reported being denied credit or facing much stricter terms than before. Business closure rates climbed to approximately 10.8% in 2023, up from 8.6% in 2019, reflecting the strain on cash flow.

In the U.S., a similar trend was observed, with rising default rates on small business loans, particularly in the hospitality, transportation, and retail sectors. A survey by the NFIB (National Federation of Independent Business) indicated that nearly 45% of small businesses viewed high credit costs as a major threat to continued operations.

Solutions: What’s Being Done Globally and in Israel?

In the U.S., the Small Business Administration (SBA) provides government-backed loan guarantees through programs such as 7(a) and 504, allowing banks to extend credit to higher-risk businesses.

In Europe, comparable programs are operated through public investment funds, with countries like Germany and France implementing mechanisms such as grants, payment deferrals, and regulatory easing.

In Israel, government-backed credit channels were established during the COVID-19 period, but recent data show a decline in the volume of approved loans. Many business owners report a bureaucratic and rigid application process, stricter collateral demands, and a lack of effective financial support from both the government and the banking system.

Looking Ahead: Is Relief on the Horizon?

Although interest rates have moderately declined in the first half of 2025, most economists forecast a period of relatively stable rates, with only gradual reductions expected. The current economic paradigm—where nominal interest rates of 3–4% are considered “normal”—marks a significant shift from the near-zero environment of the previous decade.

Small and medium-sized businesses will need to adapt to a more expensive credit landscape. Strengthening financial planning, diversifying funding sources, and implementing cost-saving technologies will become essential survival strategies. At the same time, there is a clear need for a revised government support framework—one suited to the post-COVID reality—that can provide truly accessible credit pathways for businesses outside the institutional finance system.