The Federal Reserve has been steadily raising the prime lending rate since 2017, causing confusion among business owners nationwide. Should you be worried? Use this guide created by NBC’s business financing advisors to make sense of the recent prime lending rate hikes, and find out whether or not your business is in danger.
What is a Prime Lending Rate?
A prime rate is the standard rate of interest for money borrowed by banks and traditional lenders in the US. The number is decided by taking into account the risk involved in lending to different types of businesses, and how they plan to spend the borrowed capital. The Federal Reserve raises or lowers the prime lending rate as changes and fluctuations within the business economy occur. Click here to see the exact formula used to determine the prime lending rate.
How Much Has it Increased?
The Federal Reserve increased the prime lending rate from 4.5% to 4.75%. This raises the prime rate .25 base points since their last increase back in January.
When Did it Go Into Effect?
The prime lending rate increased on March 22, making it the fourth raise of interest in the past year. Businesses borrowing from banks and traditional lenders will start feeling the effects of the increase immediately.
Why Are They Doing This?
The thought behind why the Federal Reserve keeps increasing the prime lending rate makes sense—at least in theory.
Since Trump’s Tax Cuts and Jobs Act was put into effect last year, the US business economy has been stronger than ever. In fact, studies from the National Federation of Independent Business (NFIB) indicate that the economic climate in the US is the best it’s been in 30 years. With over 1.5 trillion promised in tax cuts for businesses of all sizes, businesses across the country are given the breathing room to grow and expand their businesses like never before. This current boom in US business outweighed any concerns by the Federal Reserve as to how their prime lending rate increases could potentially negatively affect businesses—even those on tighter budgets than most.
Is Your Business In Danger?
For businesses with stable and consistent revenue, the recent prime lending rate increase of .25 base points are not going to pose much of a threat.
For others, increasing rates are posing a serious threat. Thousands of businesses are being held back from getting the extra capital they need from banks and traditional lenders, keeping them from overcoming business challenges, and seizing opportunities for growth. While securing government regulated financing options such as small business loans (SBA loans) might be the best possible option for some businesses, considering all the alternative business financing options NBC has to offer will still save them significant amounts of capital by avoiding the rising prime lending rate.
In a time when banks and traditional lenders are offering loan options with higher and higher interest rates, businesses should explore alternative business financing options that are not bound to the prime lending rate. There are many new types of alternative business financing options that cannot be offered by banks and traditional lenders. Most of these options offer interest rates that do not depend upon the algorithm results that decide the prime lending rate, but instead are based on the specific business goals clients wish to accomplish.
Here are a few examples of alternative business financing solutions that do not contain interest rates determined by the prime lending rate:
- Merchant Cash Advances (MCAs)
With a merchant cash advance, lump sum is given to business owners in exchange for a percentage of their future sales, instead of a rate of interest. This percentage fluctuates to match the amount of sales a client’s business makes daily or weekly. This means the less sales you make, the less you have to pay.
- Purchase Order Financing
Sell your invoice, for immediate access to cash. This is a popular option among such as manufacturers and retail stores, who use the extra capital to get whatever they need to fulfill the orders of their customers. With monthly interest rates as low as 1-2%, businesses can quickly and easily seize their opportunity to supply their customers, while avoiding the rising prime lending rate of banks and traditional lenders.
- Accounts Receivable Financing (AR Financing)
Turn your I.O.Us into a flexible line of credit. AR financing options from National Business Capital offer interest rates as low as .75-2%, and can be used to accomplish virtually any business goal. With immediate access to capital, NBC’s clients utilize AR financing for uses including bridging gaps between slow customer payments, purchasing inventory, and managing payroll.
Contact National Business Capital’s team of business financing advisors at (877) 482-3008, on call 24/7 to listen to your story, and help you decide if your business would benefit most from alternative financing options that aren’t affected by the prime lending rate increase. Or, fill out NBC’s 1-minute, 1-page application online to receive funding in as little as 24 hours.