Average interest rates on loans have continued to increase this year as the Federal Reserve works to address inflation by increasing its funds rate. So far this year, the US has seen the fastest interest rate increases in the last 40 years. Essentially, interest rates are the cost of borrowing money and compensation to the lenders for the risk that the borrower may not pay back the loan. As a small business, you may wish to secure a loan for future profit, such as gaining the ability to buy equipment or real estate now to create growth in revenue down the road. Rising interest rates affect us all, so read more to learn more.
Why Interest Rates Are Rising
Interest rates are determined by the supply and demand of credit. An increase in the demand for credit will raise interest rates, while an increase in the supply of credit will reduce them, and vice versa.
Inflation is a primary factor in why recent interest rates have risen. Because inflation causes lenders to lose some purchasing power of the money they are paid in the future, they require higher interest rates to offset that. According to Census.gov, the inflation rate between July 2022 and July 2023 was 3.2%. While this is better than the 9% it reached last summer, the consumer price index is still showing a rise in monthly inflation.
As inflation rises, the Federal Reserve sets a federal funds rate, which affects the interest rates banks set on their loans. When the government sells previously issued U.S. securities, that takes away money from the banks and how much they can lend, which causes a rise in interest rates as well.
Interest rates also fluctuate on a business-by-business basis. The higher the risk of the loan, meaning the likelihood that it will be paid back, the higher the interest rates will be. This can sometimes be offset by securing the loan with collateral, like a house or car, to provide less risk to the lender. Loan interest rates will also be very dependent on your credit history and credit score, with lower credit scores resulting in higher interest rates.
How Businesses Can Cover More Expensive Debt
Loans can be an extremely beneficial financial decision for your business and its long-term growth, but it can also lead to more expensive debt, especially as interest rates rise. If you find yourself in this scenario, there are a few options to consider when deciding the best way to handle your debt.
Debt consolidation is an option if you have multiple debts with high interest rates. One way to do so is via credit card balance transfers, in which credit card companies offer zero or low-interest balance transfers to consolidate debt from multiple credit cards onto one card. You can also look into getting a debt consolidation loan, which converts your debts into one loan payment, often offering a lower interest rate than what you are already paying. When considering these options, it’s important to understand if the terms only last for a certain time or if terms will change based on other factors.
Debt relief or debt settlement companies can be an option, although working with a debt settlement company can be risky. Before agreeing to work with one, consider working with a nonprofit credit counselor — you may even be able to negotiate directly with your creditor yourself. Credit counselors can help you develop a debt management plan with your creditors that you can afford.
Speak with a Business Banking Expert
Whether you need to know more about interest rates, are looking to apply for a loan, or simply want to explore options for your business, it is always prudent to speak with a Business Banking expert. They can help you determine the best path forward and set your business up for long-term success. Call us today at 800-526-9127 and visit our website for more resources.