How the Federal Interest Rate Increase Could Affect Small Businesses

For the second time in a decade, the Federal Reserve raised the target interest rate by 0.25%. The current range is now 0.5%-0.75%. Rates are still much lower than they were in the mid-2000s, though there is likely to be a series of gradual increases over the next couple of years.

For small business owners in need of capital, the question is, how will this affect your business?

What Does a Rate Hike Say About the Economy?

When the Fed raises rates, it is generally a positive commentary on the state of the economy. When rates were raised in December 2015, after 9 years with no increases, it was taken to be a sign of a growing economy. Specifically, continuous growth in the GDP and decreasing unemployment numbers help embolden the Federal Reserve.

This year’s rate hike is viewed as confirmation that the economy continues to be healthy. Recently published unemployment numbers showed an unemployment rate of 4.6%, a decrease, a 0.3% decrease from the previous month.

This is good news for small businesses. A good economy means consumers are more willing to spend. It allows for price increases if necessary and provides a positive outlook for the future. Consumers who have pushed off home projects, for example, may be more emboldened to hire a contractor now that the economy appears to be more stable.

Will Banks Lend More?

Higher interest rates on loans means banks will be able to make more on a loan. While the last rate increase did not appear to have a positive impact on bank lending for small businesses, there is a chance that the possibility for increased margins will encourage banks to originate more loans for small businesses. However, because so few business loans are currently being made, many businesses in need of cash flow will still be left behind.

This isn’t the whole picture, though. With an upcoming change of administration and discussion about deregulation, there is a chance that bank lending for small businesses will increase in the future. For those who are currently in need of capital, it is necessary and wise to seek other options.

Alternatives to Bank Loans

With a high rejection rate and a lengthy application process, applying for a bank loan or SBA loan can be disheartening and time-consuming. Thankfully, bank loans aren’t the only option for small businesses and contractors.

To stay competitive and fund growth, small business owners should investigate alternative options such as factoring and purchase order financing. Thinking outside the traditional “loan” model and investigating credit groups can provide opportunities to fund your business so you can focus on what you love to do and not how to pay for supplies.

Overall, this is only a small interest rate increase, and it is likely that 2017 will bring more. It’s unnecessary to worry, however, it is wise to plan to ensure your business will have the cash flow it needs to succeed.

If you’re ready to create a plan and learn more about single invoice factoring and purchase order financing, contact Capstone Corporate Funding. A trained professional will provide you with the information you need to determine if our services are a good fit for your company.