You may have been paying attention to the news coming out of the Federal Reserve recently - interest rates continuing to climb in order to fight back against inflation. This of course impacts the whole economy, potentially from your mortgage payment to your credit card bill. But, what does this mean for your investments in local businesses on Honeycomb?*
Why interest rates are increasing like crazy
You’ve probably noticed the inflation that we’ve all been experiencing for the past year - have you seen the price of eggs lately? Well, the Fed’s job is essentially to curb that growth in inflation while also keeping the economy humming and growing.
What this means is that they need to have some kind of lever to kind of “relieve the pressure” on the economy that inflation is causing. And that pressure valve is interest rates.
What this means for lenders and borrowers
A lot of lenders use something known as the Prime Rate, which is a commonly-used and constantly changing interest rate based on the Fed’s federal funds rate. All kinds of interest rates are based on the prime rate - credit card debt, housing loans, car loans, that kind of thing. Many small business loans also use the prime rate.
So, when a borrower takes out money, often it’s a variable rate loan. This means that they often don’t really know how much they’re going to be paying back, depending on the prime rate. It makes it hard to prepare for the future - although they can bet that these days their interest rate is just going to keep going up.
This can cause a bit of instability for the borrower. If interest rates keep going up in conjunction with other economic cues like a possible recession, it can put a lot of stress and pressure on both the borrower and the lender.
However, some platforms, like Honeycomb, offer fixed interest rates. This means that it won’t change, no matter what the Prime Rate does. This can offer more stability for both the borrower and the lender - the borrower knows exactly what their repayment is going to be every month, and the lender knows what they’re going to get back.
Honeycomb also doesn’t charge a fee for early repayments like some other lenders. This is more of an advantage for the borrower for sure, but it helps provide a pulse on how successful the business is doing to the investor. And after all, isn’t investing in local businesses all about making sure your favorite businesses in your neighborhood are succeeding?
Supporting independently-owned businesses through inflation while growing your wallet
Local business investors like you are more important than ever because you’re providing the opportunity for small businesses to sustainably grow. Find businesses live on Honeycomb now seeking investments!
*This blog is for educational purposes only and should not be considered investment advice. Investing is inherently risky and investors should be prepared to lose some or all of their investment.