The U.S. nearly made it through 2015 free of any rate hikes until about two weeks ago. The Federal Reserve decided to raise interest rates for the first time in almost ten years, and although it may seem like a small increase (0.25%), economists expect the Fed Funds rate to increase again in March or possibly June.
What does that mean for your finances?
Savers should start looking for higher rates on savings accounts and CD’s in order to get more for their money; homeowners may want to consider locking in a fixed-rate; credit card holders with revolving credit balances may want to perform a balance transfer, and; investors should stick to long-term investments. Finally, entrepreneurs and business owners with business loans should expect rates to rise, but only for lenders who use the prime rate to set their rates.
How Will Business Owners be Affected?
Fed Chairwoman, Janet L. Yellen, stressed that the Fed plans to slowly increase the interest rates so it can remain as low as possible for as long as possible. Lower rates encourage businesses and consumers to spend, rather than save, which helps boost the economy.
If you’re considering a business loan, you should understand that not all lenders will be affected. Some alternative business loan providers, such as SnapCap, have rates that are not heavily influenced by the Fed, unlike a business loan with the SBA. SBA loans are based off of the prime rate, the rate banks charge their most creditworthy borrowers.
Business owners that use a business credit card and carry a revolving balance will feel the effects of the rate hike almost immediately. They can expect to see an increase in their monthly payment and may want to consider performing a balance transfer to a 0% interest credit card in order to avoid forking over extra cash in interest payments.
The good news is that big banks will likely start approving more loans because an increase in interest rates combined with record high creditworthiness of new borrowers means more money in their hands. Take heed though, because these interest rates aren’t fixed and will rise every time the prime rate increases.
Actionable Steps for Business Loan Borrowers
If you have a small business loan or plan to apply for one in the near future, here’s what you should do:
- Maintain good credit. Everyone knows the best rates are offered to consumers with good - excellent credit, so a rate hike of 0.25% from 6.99% loan is much better than a hike from a loan with 14.99% APR. You can help maintain and build good business credit by regularly monitoring your credit at Nav.com. You can monitor your personal credit score, too!
- Reduce debt. Debt carriers should always work towards limiting their debt load no matter what the prime rate sits at. Look for ways to cut costs, like subleasing unused space or reducing the number of employees, adjust your budget, and allocate funds appropriately. As an added bonus, you’ll love watching your credit score grow every month!
If you don’t have a separate business credit score, you should establish business credit by registering for a DUNS number, open a business account, and buy from vendors who report to credit reporting agencies. If you have more than one business loan, it may be wise to consolidate your loans, if that’s an option for you.