What is the Fed, and Why is it Raising Interest Rates for Small Businesses?
We’ve all seen the headlines - “Fed raises rates at historic pace”, “Fed continues to increase rates with stubborn inflation”, “Federal Reserve forecasts more interest rate hikes to come”, but who is this mysterious Fed, why are they raising rates, what does this all mean for small businesses, and how can small businesses fight against rising interest rates?
Well, the TLDR is that interest rates are rising in order to fight inflation, and that comes at the expense of small businesses who are looking to borrow money to grow! However, all hope is not lost, and if small businesses act quickly and lock in a fixed interest rate, they can get a hopefully lower (and certainly more stable) interest rate than they would pay in the future. Read on to get all the details, and learn how Honeycomb Credit can help small businesses get set up for success in the future.
Who is the Fed, and why should I care?
The Federal Reserve or the “Fed” as it is commonly known, is the central bank of the United States. Their job is that they’re responsible for setting interest rates in the economy to support long term economic growth and manage inflation. That’s no small job - have you seen the price of eggs lately?
The Fed’s biggest goal is to keep the economy humming but they only have pretty limited tools with which to do this. The main instrument at their disposal is the Federal Funds Rate. To spare you all the boring details, the Federal Funds Rate is used as the baseline cost of money in the economy. As the Fed raises the rate, they make less money available to be lent out, which drives up interest rates across the economy - from personal loans like for your house or car to commercial loans like for your small business.
But, why would the Fed want to cool down the economy?
I know, it sounds perplexing. Why would the government want to slow down the U.S. economy, when it seems like it needs a boost? In short, the Fed raises rates to try to cool down an overheated economy, prevent a big market crash, or to tame inflation.
The Fed is trying to accomplish a “soft landing,” meaning that the economy continues to grow, albeit at a slower rate, while bringing inflation down to a more manageable level for U.S. households. Unfortunately, sticking that soft landing is no easy feat, and comes at the expense for small businesses who may want to take out a loan in the coming years.
What does this mean for my small business?
The good news is that it means that inflation will likely come under control with prices on everything from fuel to labor to food stabilizing or even decreasing over the months ahead. This is great for your bottom line, of course.
The bad news is that it is getting much more expensive to borrow money. Most small business loans are based on an indicator called the “Prime Rate.” This is a constantly changing, commonly used interest rate, and applies to all kinds of loans, from commercial loans to credit cards.
You’ll often hear lenders talk about a “Prime + 3” or “Prime + 5” loan, which simply means the assigned interest rate is 3% or 5% above the Prime Rate, respectively. The Prime Rate has increased from 3.25% in March 2021 to 7.5% in January 2022. This has a ripple effect all throughout the economy; as of this writing the average home mortgage interest rate went from under 3% to nearly 7% over the past year.
What can I do to set my business up for success as interest rates keep going up?
If you have an already-existing loan
First, check to see if your interest rate is variable or fixed. A fixed rate loan means you are locked into a rate and that the Fed’s increases won’t impact you, but a variable rate loan means that your loan is going to continue to get more expensive as the Fed continues to raise rates. You may even consider refinancing your variable rate loans to have your rates locked in (which is one of the services that Honeycomb Credit offers).
If you’re looking to take out a new loan
If you are considering a new loan to expand your business, look for fixed rate options. The Fed has made public statements that they anticipate raising interest rates for months to come, and getting locked into a rate now could seem like a bargain in the months ahead. Another feature to look for in a loan is the ability to refinance or pay down early without a penalty. Many lenders charge businesses a large fee for repaying early, but in the event that rates do start to come down in the years ahead, you will want the ability to refinance your loan.
Honeycomb Credit loans offer all of the above! Our interest rates are fixed, so you know exactly how much you’ll be repaying month-to-month, and will have the peace of mind that it won’t change on you at the whims of the Prime Rate. We also allow early repayment with no fees!
The best part also is that the loan you’re taking out isn’t coming from a bank, or even from Honeycomb for that matter - it comes from your community. This means that when they invest in you, you get to pay them back, and who doesn’t like getting paid back with interest?
Lock in your best interest rate today with Honeycomb Credit
The irony of the Fed making it more expensive to borrow money in order to lower inflation is not lost on us! We know this inflationary environment and the increased cost of borrowing money creates new challenges for you as a business owner, but there are ways you can set your business up for success by locking in lower rates now.
Want to learn more about Honeycomb’s fixed rate loans with no prepayment penalty? Fill out the form below!