Tuesday, December 15, 2015

What Effects The Fed's Expected Interest Rate Increase May Have on Small-Business Lending

With the Federal Reserve set to raise interest rates for the first time in seven years, there’s been lots of talk about its impact on investors and home-buyers. But any increase will also affect entrepreneurs who are trying to finance operations or expand to new areas.

What will an increase in rates mean for business owners? 

The obvious answer is that interest rates on small-business loans should go up. But the Fed’s move to increase rates after keeping borrowing near zero since the financial crisis is expected to be slow and easy, perhaps just 25 basis points this week, meaning that any impact on business borrowing costs should be minimal at first. Then, too, banks – which pulled back from small business lending during the financial crisis – might increase their lending to small businesses if the economy improves. That would be especially welcome as bank loans are cheaper than most other sources of capital.

The Bigger Question.

The bigger question over time – and one that hasn’t been tested in previous market cycles – is what will happen to the marketplace lenders that rely on algorithms and higher rates to fill the gap left by banks for small-business loans. These marketplace lenders have relied on money from hedge funds and private-equity firms who have been searching for yield in a low interest-rate environment. Whether that liquidity remains or not as rates rise depends what happens to the spread between marketplace loans and corporate debt over time – and how much risk investors are willing to take in a credit environment that’s become increasingly concerned about risk.

Fed policy is only one factor in small-business loan rates, as anyone who’s tried to get financing the past few years and been offered a loan at 40% or higher despite historically low interest rates knows. Whether banks truly return to small-business lending, how lenders are able to use technology to improve their underwriting, and whether the economy is on better footing will all be factors going forward. In the meantime, if you’re looking to start a business or get financing now, there are other things to worry about than the Fed’s decision.

To prepare for the coming change please contact Redmount Capital Partners or learn more about our capabilities.
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