How Will the Fed Interest Rate Increase Affect Small Business Lending?

When the average small business owner reads about the recent interest rate increase, these details can read simply as theoretical numbers on a page, far removed from the daily realities of running a business. There is, however, some potential for direct impact from a changing fed funds rate—particularly on any small business intending to take out a loan in the next few years.

In theory, when the federal interest rate rises, the rates for things like car loans, mortgages, and yes, small business loans, will rise proportionately. But given the current economic climate, is that likely to be the case this time around?

What the Rising Federal Funds Rate Means

Given that the federal fund’s rate has hovered close to zero since the onset of the great recession—a strategy by the US Federal Reserve to help boost the economy—it was only a matter of time before the rate began to increase. As a result, economists expect the rate to continue its rise at a slow but steady rate over the coming years as the economy continues to improve.

While the concept of paying a higher interest rate may be less than appealing to consumers as well as business owners, the accompanying indication of the country’s overall economic health is good news for all sides of the equation.

Potential for More Competition in Business Lending

Counterintuitively, the fed interest rate may actually have a net positive impact on business owners in the short term as banks slowly dip their toes back into the small business lending pool. Following the 2008 fiscal crisis, traditional banks all but completely shuttered their loan offerings to small business owners, citing high risk and low profit margins as a reason to avoid small business loans. While a growing marketplace of online alternative lenders have stepped in to fill the small business lending void, the result for business owners has been more choice at a higher cost.

If traditional banks do take this cue to loosen the reins on their small business lending standards, the resulting uptick in the availability of bank loans could force down the rates from alternative lenders eager to maintain their market share.

Sooner Is Better than Later for Business Borrowers

While business owners might not feel the impact right now, a continuation of this trend over the next several years could eventually translate to an increase in small business loan rates. For business owners considering a loan or line of credit in the next several years, this is one more reason to take such steps sooner rather than later.

There’s no denying that over time, changes in the federal interest rate do lead to impacts on the state of small business lending as an industry. However, because of the wide range of factors—from the business owner’s credit score to the business’s financial status—that contribute to the interest rate on each business borrower’s loan, it’s unlikely that individual business owners will see a correlation between the Fed interest rate increase and their own small business loan rates.

Meredith Wood is the head of content and editor-in-chief at Fundera, an online marketplace for small business loans. Prior to Fundera, Meredith was the CCO at Funding Gates. Meredith manages financing columns on Inc, Entrepreneur, HuffPo and more, and her advice can be seen on Yahoo!, Daily Worth, Fox Business, Amex OPEN, Intuit, the SBA and much more.

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