Rising interest rates are making it more expensive for companies and consumers to borrow money, signaling that the period of "cheap money" that followed the Great Recession of 2008-2009 is finally coming to an end.

Borrowing costs are rising across the economy in the wake of the Fed's rate hikes. The yield on the 10-year Treasury rose above 3% in May and June, and the average annual rate for a 30-year fixed mortgage increased to 5.4% in May. Credit card interest rates are creeping up as well.

The biggest companies and wealthiest consumers are expected to weather the more expensive environment without significant distress. Many of the largest companies are flush with capital raised when interest rates were low and have pushed out the timeline for when their debts come due. Recessions hit households with lower incomes harder than they do more affluent households.

This is the third part of a series of articles examining the prospects for a U.S. recession and the Federal Reserve's efforts to achieve a "soft landing" for the economy. Part 1: US Fed aims for soft landing as economists see recession odds growing Part 2: As inflation soars, consumers brace for a hard landing Part 3: As cheap-money era ends, smaller companies face capital crunch Part 4: Risk management, low unemployment insulate banks in case of recession .

Smaller private companies that play important roles in the supply chains of larger companies will likely feel the most pressure as interest rates rise, said James Gellert, chairman and CEO of RapidRatings International. The pain felt by small private companies will present a challenge to the larger companies that depend on them, Gellert said.

"There will definitely be high profile companies that suffer pain because they have not managed the private company supplier risk as well as they need to," Gellert said.

The small will struggle

Many small businesses saw their operations upended by the pandemic, but easy access to capital, along with federal paycheck support programs, kept their potential for bankruptcy or default at bay.

With reduced bond issuance, higher interest rates and greater inflation, less capital will be allocated to riskier parts of credit markets. Struggling private companies that do not fail will likely be acquired by a private equity firm or a larger competitor, Gellert said.

Private equity firm CREO Capital Partners, which focuses on food-related companies, is watching for companies that experience unusual shocks to their costs but would be profitable under more normal circumstances, CREO founding partner Rob Holland said.

"If wheat prices are up 60% and you're a player in a bakery business, your profitability in the current environment is, by no means, going to be normal," Holland said.

'A more challenging environment'

Gone are the days when investors wanted companies that prioritized growth over profitability. The profitability metric earnings before interest, taxes, depreciation and amortization is back in vogue.

"Small businesses that have relied on hefty growth to sort of get them through, now are going to be in a more challenging environment to raise capital," Holland said. "Where those businesses that are more scaled and therefore more profitable are going to be in a better position."

Rising rates put pressure on companies that operate with tight margins and will make it harder for them to manage any distress they could face in a downturn, said Peter Young, a partner in the bankruptcy group at law firm Proskauer Rose LLP.

Many lenders have become less flexible than they were during the pandemic. Rising interest rates will make loans harder to qualify for, meaning that some companies will not be able to access traditional capital markets and will have to turn to more expensive lenders of last resort.

"They're going to wind up paying significantly in excess of what they might otherwise have paid in sort of better boom times," Young said.

Big companies are well positioned

With rates on the rise, companies are facing higher costs for debt coming due and interest expenses. But the impact has been significantly lessened by companies locking in lower-rate debt and pushing out maturities when financing conditions were historically favorable under the Federal Reserve's ultra-loose monetary policy during the height of the pandemic, according to Ian VanderHorn, a principal research analyst at S&P Global Market Intelligence.

In a June 1 paper on the potential impact of rising rates on dividends, VanderHorn found that few S&P 1500 companies' dividend plans would be impacted by higher rates, largely due to significant refinancing by many of these companies in 2021 in anticipation of rate hikes in 2022.

"Companies anticipated interest rates rising, and many of them, especially the larger ones that have ready access to capital markets and banking systems, refinanced their debt and pushed it out," VanderHorn said in an interview.

Companies that issue debt to compensate for periods of low cash flow, to raise capital for an acquisition or to refinance older debt coming due will now see expenses rise. This could impact future planning for dividend payments, although it will most likely cause companies with higher costs to slow dividend growth rather than reduce payments. Some companies may suspend dividends temporarily, though this would likely be due to a combination of factors, such as ongoing supply chain issues or sluggish sales, rather than strictly the expected rise in rates.

Among all sectors, energy companies are likely best positioned to deal with rising rates as excess profits from higher oil and gas prices have bolstered their balance sheet and led to higher dividend payments, according to VanderHorn.

Companies most exposed to higher debt costs are mostly smaller companies with less access to capital markets or larger companies that are still facing impacts from the pandemic, such as cruise liners and casinos.