Disclaimer: Information in the business line of credit articles is provided for general information only, does not constitute financial advice, and does not necessarily describe Biz2Credit commercial financing products. In fact, information in the business line of credit articles often covers financial products that Biz2Credit does not currently offer.

For many small businesses, borrowing money is one of the best ways to invest in growth and navigate financial challenges. Business loan interest rates are largely influenced by the prime rate, or federal funds rate, set by the United States Federal Reserve.

Between March 2020 and July 2023, the prime rate steadily increased. However, starting in September 2024, rates have finally started to come down.

That’s great news for small business owners who rely on competitive business line of credit interest rates and term loan interest rates to access capital.

In this article:

• Understand how interest rates impact businesses and the national economy.
• Learn what is the interest rate today and what that means for your business.
• Explore how lowering commercial line of credit rates can give your business better access to working capital.

How Interest Rates Affect Loans

The federal funds rate is the interest rate that banks use when lending money to each other. It helps set the high-water mark for nearly all other interest rates, and when the Fed raises rates, most banks follow suit with higher interest rates. The trickle-down effects from the rate increases show up in business line of credit interest rates, business credit cards, and other financial products, and can cause serious heartburn for business owners.

Even a small increase in interest rates can add up to thousands of dollars in additional costs to borrowers. Business owners with existing fixed-rate loans won’t be impacted by national interest rate changes, but new borrowers with variable-rate loans could experience changing rates.

Many business credit cards and commercial line of credit rates are based on the federal funds rate. Most providers list their rates as “prime plus XX%,” indicating that business line of credit interest rates and credit card rates change with the prime rate. If you pay off your credit card balance every month, it’s no problem. But if you have a line of credit, you need to know how much is the interest rate because every time you draw money, you’ll have to pay that amount back in interest.

When interest rates are low, it’s easier to get more affordable small business loans. Not only will low interest rates mean lower monthly payments, but it may make them affordable enough to qualify for higher loan amounts to address even more business needs.

How Interest Rates Affect Employment

The effect of interest rates goes much further than loan prices. When rates are low, people and businesses tend to use their money instead of building emergency funds or stashing it in a business bank account. As the cash flows through the economy, many businesses see the need to invest in hiring to keep up with the demand from so many new consumers. The new employees go out and become consumers themselves, spending their higher paychecks, and the cycle continues from there.

Increased demand for workers drives higher wages, and increased demand for “stuff” drives those prices. This effect is tied to inflation, which causes the Fed to raise rates in the first place, but as they do, the cycle tends to slow.

How to Prepare for Lowering Interest Rates

The good news for American entrepreneurs is that after several years of rate increases, the prime rate projects to continue decreasing for the foreseeable future. While borrowing costs may still be high compared to 2020 levels, it’s a good time to start thinking about the next steps for your business.

There are many financing options available to both startups and more established businesses. Regardless of your industry or business needs, now is a good time to start exploring the best business lines of credit offers, lending products, and cash advances that could be available to your business.

These are some steps to take before you consider funding.

Forecast the future

What’s your one-year business plan? Three years? Five years? Think about how you want to grow your business and what business assets you already have to reach those goals. Will you be able to scale production with the annual revenues you get from your existing customer base? Can you afford to navigate a financial emergency without funding?

It’s important to figure out if short-term funding can help you reach long-term goals, or if you need a heftier lump sum to invest in real estate or other major assets to scale your business. Whatever your goals, there’s likely a lender out there that can help.

Consider financing options

Whether you’re looking short-term or long-term, there are a wide range of financing options available. Some of the most common include:

• Term loans: Upfront, lump sum deposits to your business checking account or savings account that come with regular repayment terms through the end of the loan.
• SBA loans: Backed by the U.S. Small Business Administration (SBA), these loan programs provide a partial guarantee from the federal government to lenders, reducing some of the risk. They’re typically available from traditional financial institutions, like banks or credit unions, but some online lenders also offer them.
• Business line of credit: A flexible form of funding in which a lender approves your business for a maximum credit limit, but you only pay interest on the amount you draw rather than the full loan amount. This makes it something of a cross between a loan and a credit card. As the prime rate goes down, business line of credit interest rates become more appealing.
• Cash advances: Business cash advance programs like invoice factoring or merchant cash advances (MCAs) provide businesses with funding in exchange for accounts receivable. In invoice factoring, you sell outstanding, unpaid invoices to a third-party at a discount. In MCAs, you repay an upfront loan via future sales based on a factor rate.

Different funding solutions may be more suitable for different types of business expenses, so make sure to research each before you make a decision.

Determine your eligibility

Each of the funding options we mentioned above will have different eligibility requirements. Lenders themselves will have different requirements for different products. As such, it’s important to research lender eligibility requirements or work directly with a loan officer to determine what kind of funding your business may be able to get.

All of that said, the general eligibility breakdown looks like this:

• Term loans: Business lenders require higher minimum credit scores, stronger credit history, longer time in business, and higher annual revenues to get the most competitive rates. You may also have to put up collateral or provide a personal guarantee.
• SBA loans: Although the risk to lenders is lower, SBA loans often have high credit, time in business, and revenue requirements to qualify for lower interest rates.
• Business lines of credit: An unsecured business line of credit does not require collateral, and usually has less stringent time in business, annual revenue, or personal credit score and business credit score To get a secured line of credit, you can put up collateral in the form of business assets or personal finances for a larger line amount or lower business line of credit interest rates.
• Cash advances: Typically the easiest type of financing to qualify for and the fastest to receive, cash advances have lower eligibility requirements but often come with frequent repayment schedules, monthly fees, or other caveats.

The loan application process varies between lenders and loan types, but it’s usually easy to apply online or work directly with a loan officer. Always ask how much is the interest rate, whether you’re looking at business line of credit interest rates or term loan rates.

Understand the loan terms you can afford

Loans typically carry an annual percentage rate (APR) that represents additional charges you’ll pay on top of the loan principal to repay the loan. Interest rates are subject to credit approval and can drop based on your creditworthiness. Nonetheless, even if you have good credit, it’s important to assess how much your business can afford to pay back based on competitive rates.

Remember, an interest rate isn’t always the only amount you pay back. Many loans come with origination fees and maintenance fees. Some business credit cards or lines of credit have annual fees or fees every time you debit the credit line.

Whether you’re doing online banking or working with a giant like Wells Fargo or Bank of America, take the time to figure out the true cost of any type of loan.

Conclusion

As the federal funds rate drops, you can expect to find better business line of credit interest rates and more compelling lending products. As such, now is the time to get prepared. Look at your business plan and figure out how much funding you need to meet your business’s goals. Always ask what the interest rate for different types of financing is to determine what you can afford to pay back.

FAQs

What is the federal funds rate?

The federal funds rate, or prime rate, is the interest rate that banks charge one another for short-term borrowing. It essentially serves as a benchmark for all loan products in the U.S. As such, when the rate is high, business line of credit interest rates, mortgage rates, and other loan rates tend to be high, too.

What is the interest rate today?

As of November 14, 2024, the effective federal funds rate (EFFR) is 4.58%.

How do interest rates impact small businesses?

Interest rates have a significant impact on the economy and, therefore, on small businesses. When interest rates are high, it’s more expensive to borrow money, making it less likely that small businesses can expand. Likewise, since fewer people are borrowing, there tends to be less cash in the economy, leading to reduced consumer spending, which often forces businesses to raise prices.

What are today’s commercial line of credit rates?

As of November 14, 2024, the average business line of credit interest rate is between 8% and 60%.

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