For the third consecutive quarter, the Federal Reserve decided on 6/14/17 to raise its benchmark interest rate, the Federal Funds rate. Many business owners are curious as to how this affects their business and what this means going forward. There are three important takeaways that you should know with regards to how the Fed Rate increase may impact your business.
- The increased .25% in the Fed Funds rate will mean that variable interest rates on debt will go up. Variable interest rates are typically tied to the Prime Rate (which is closely related to the Fed Funds rate). When the Prime Rate goes up, variable interest rates go up. This could cause monthly payments to go up and impact how much interest you pay on your debt over the term of the loan.
- Future loans will have higher interest rates and be more expensive. A higher Fed Funds rate will translate into higher interest rates on future loans from lenders. With highly anticipated increases in the Fed Funds rate over the next several years, borrowing money for big purchases are only going to get more and more expensive.
- With a higher Fed Funds rate, borrowing power will be decrease. This means that a year from now, a purchase that you put off will be more expensive due to the higher rate and you may not be able to afford the payments. Your borrowing power will decrease because you will now only be able to borrow a portion of what you could have borrowed a year prior, had you made the purchase when rates were lower.
Knowing the impact of the Fed Funds rate increase on your company is important when considering when to make a big financing decision. If you are planning on financing a new purchase but are waiting for whatever reason, you may want to reconsider your purchase timeline. Making a purchase now, as opposed to a year from now, could save you a whole percentage point on your interest rate if the Fed Funds rate continues to rise as expected.