The Federal Reserve’s move to increase interest rates in March prompted banks to raise the prime rate from 4.5% to 4.75%. Borrowers with loans tied to prime also saw their rates climb. With indications that more Federal increases could follow, business owners need to evaluate if it makes sense to lock in lower rates on new loans or refinance existing debt now.
Why the Fed raises rates
One reason the Fed raises interest rates is to keep inflation under control. Basic economics teaches that as demand goes up, prices go up. When the Fed raises rates, it makes borrowing more expensive. Higher prices are expected to slow demand and limit inflation.
Where the increase is felt
Changes in the prime rate have an immediate impact on loans and credit cards with variable rates.
When is the next decision on interest rates?
The Federal Open Market Committee (FOMC), the body that determines Central Bank interest rates, next meets June 12-13.
How business owners can ease the effect of rising rates
No one can say for sure that the FOMC will follow through with higher rates. But with a strong economy, and the Fed’s indication that they’ll gradually increase rates through 2020, wise business owners are looking at how their debt is structured. Even small increases in interest can have a big effect on cash flow. Now is a good time evaluate the financing of your debt.
If you use a business credit card with a variable rate and you don’t pay the balance in full, consider if a business line of credit is right for you. It could lower the costs of short-term borrowing. In addition to covering daily expenses, many businesses tap into a line of credit to meet payroll and cover accounts payable.
Businesses planning on expansion projects can also hedge against rising interest rates by locking in rates today.
With smart planning, you can ease the hit of higher interest rates. Our business development managerscan help you evaluate the best way to finance your business operations and projects. Or just give us a call at 800-992-2221!
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