Tip: What the Fed’s Rate Hike Means for Small Businesses
The Federal Reserve’s mid-March hike to interest rates – its second increase to base interest rates in three months – was a strong confirmation that the economy is doing well. The Fed had kept interest rates at historically low levels in order to support a recovery after the recent recession (commonly referred to as the Great Recession), which occurred, roughly, between December 2007 and February 2010. The Fed’s move means that businesses will pay higher interest rates when they take out a loan. Some major banks have already indicated that the current quarter-point boost will translate into a prime lending rate of 4 percent (up from 3.75 percent). If you are wondering how this increase is positive news for small business owners and entrepreneurs, read on.
- Look beyond the rate hike to consider the overall lending climate and general prognosis for U.S. businesses. Credit has been very tight after the Great Recession – especially for smaller firms. The rate hikes does mean that borrowers will pay more interest, but also that their chances of securing the loan they need have increased exponentially. When confidence in the economy accelerates, banks and lending institutions are more likely to approve loan applications from qualified applicants. Major banking institutions approved 24.1 percent of loan applications in February 2017 – making it the seventh consecutive month of positive growth.
- Change gears if the time is right. Interest rates hovered around 2 percent or 3 percent for a long time, and many of us got used to it. Now we are seeing rates increase and the Fed is indicating that additional gradual increases might be on the horizon. If you have expansion or improvement plans in your back pocket that will require bank funding, it may be time to seize the moment. The cost of borrowing will – most likely – continue to increase.
- Check out your local banks. Borrowing is expected to get easier for customers of smaller banks as well as large institutions. Amongst big banks, loan approvals currently are about one in four. Regional and community banks have not seen a big shift in approval rates in the last few months, with rates hovering around 50 percent. However, if the Trump Administration makes good on its intentions to reform the Dodd-Frank legislation and reduce the regulatory requirements on smaller banks, then banking analysts expect credit will flow more easily to Main Street.
- Consider re-evaluating the basic tenets of your financial plan. Is it time to review your credit scores and address any issues that will improve how credit-worthy you appear to potential lenders? Perhaps now is the time to consolidate some of your debts. If you are paying off high-interest credit cards or other similar debts, consider taking advantage of today’s economic optimism to secure a loan with lower interest rates – and do so while these rates remain relatively modest. Decisions like this should be taken only after proper research and consultation with your tax and financial planning professionals.
Despite daily newspaper headlines featuring political issues, the U.S. economy continues to look good, and the Fed’s recent actions underscore this optimism. Make sure you and your business are ready to take advantage of the opportunities this presents.