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Fed Plan Could Drive Business Loan Interest Rates Higher

Businessman and interest rates
Business lending could become more expensive or restrictive in the future due to the Federal Reserve Bank of New York’s recent announcement about bond purchases.

Last month, the New York Fed announced that by the end of 2013 and the beginning of 2014 they would likely reduce and then eliminate their monthly bond purchases. Although the reduction will not begin for several months, and relies on the economy acting according to forecasts, the announcement caused mortgage interest rates to increase at a staggering rate.

Although the impact on the housing industry is more apparent, there are other forms of lending that could be impacted, such as business loans. Loans.org spoke with several lending experts about their predictions for business loan availability and interest rates.

Chris Nichols, chief strategy officer for CenterState Bank, said the Fed’s announcement and future reduction plans have caused interest rates to increase, which increases the cost to borrow some types of business loans. 

“It is a dance between the positive aspects of the economy getting strong, that drives rates higher, and the negative impact to credit caused by an increase in borrowing expense,” he said. “The direction of the net of these two opposing forces depends on what type of business and how sensitive their business is to interest rates.”

He continued stating that although the “knee jerk conclusion” of higher rates is to assume that it will cost businesses more, depending on the business and its ability to benefit from a stronger economy, the business could wind up in a net positive position.

Nichols expects the rates to rise, but only at a meager pace. He said the cost of borrowing business loans has increased about 1 percent since June, depending on the maturity of the loan. Despite this increase, interest rates are still near historic lows.

“Until employment improves, we are not at risk for seriously higher rates,” he said.

Despite Nichols’ predictions, other experts including the Small Business Administration (SBA) do not believe that the announcement will impact business loans.

SBA spokesperson, David Hall, told loans.org that there is no “indication that the Fed’s announcement reducing and then eliminating bond purchases last month has had any noticeable impact on business lending, nor did [the SBA] anticipate any.”

Jeremy Brown, CEO of RapidAdvance, said that while the Fed’s announcement might have some long-term impact, it does not have any significant short-term impact because of the stability of the Wall Street Journal prime rate. This rate is an index used by banks on consumer loan products including business loans. This rate is at 3.25 percent, which is where it has been for over a year.

Unlike interest rates for mortgages, this rate does not change as rapidly and therefore borrowers of consumer loans are less likely to see their interest rates affected by it.

Although Brown predicts that interest rates will increase by 1 or 2 percent, this is not the borrower’s biggest concern.

“The big thing for small businesses is the availability of funds, rather than having to pay an additional 1 or 2 percent,” he said.

Others predict changes will take more time. David Goldin, CEO of AmeriMerchant, said recognizable changes could occur in one or two years.

“In the short-term, it is really immaterial,” he said.

One potential difference is a change in demand. Goldin said that there is a lot of available capital in the market now. If interest rates increase and lending begins to tighten, the marketplace will have less capital to work with.

Brown said that interest rates are only part of a larger equation for business owners. He said that the demand for business loans is tied to consumer confidence in the economy. When confidence increases, so does the demand for funding.

“It’s more about sentiment and confidence than it is about interest rates. There has to be available capital in order to fuel that growth,” Brown said.