The Federal Open Market Committee has raised the federal funds rate three times throughout this year so far, with possibly another one to come in December, and expects to increase rates at least three times more next year.
The reason for the increases is due to a strengthening economy. Unemployment is low, economic growth is meeting expectations and inflation relatively stable. All good news for business owners but an increase in the cost of borrowing will ultimately influence profitability as costs rise.
When the Fed increases its rates, prime rates rise as well. Banks typically base their interest rates on prime which is typically 3 points higher than the Fed rate. This means an increase in prime interest will cause adjustable-rate loans, interest-only mortgages, and credit card rates to rise. Usually, small business loans and lines of credit costs also increase proportionately with a rise in the fed funds rate. This additional cost may build and put a cash-flow strain on businesses, but more importantly, these increases put a pressure on small businesses to secure a loan or line of credit sooner rather than later to try to lock in a better rate.
Before rushing out to secure a loan or line of credit, consider some other options like invoice factoring. Interest rates are rising across the board and expecting more increases over the next two years, but not all funding options are tied to prime, LIBOR, or the fed funds rate. Invoice factoring frees up your working capital, so your business can grow with the economy. Forget the stress of increasing interest rates. The costs relating to financing receivables are based on the value of your invoices, not the rising interest rates. You sell your receivables to a factoring company, and that company advances you money, so you can keep growing your business. Eagle Business Credit offers a quick, easy, and stress-free solution to funding your business.