When the Federal Reserve raises or cuts interest rates, it does not set the rate on your loan. But the decision reaches your business fast through anything tied to your bank’s prime rate, and slowly through what your customers can afford to spend.
What the Fed actually decides
The Fed’s rate-setting group, the Federal Open Market Committee, meets on a schedule it publishes ahead of time. At each meeting it sets a target range for the federal funds rate. That is the rate banks charge each other to borrow overnight.
You will never pay that rate. What matters is what banks do next. Most banks set a prime rate, a base rate they use to price many business and consumer loans, and they usually move it in step with the Fed, often within a day.
So the path looks like this: the Fed moves its target, banks move prime, and anything priced as “prime plus” something moves with it.
Where you feel it first
Business credit cards. Most card rates are variable. Your cardholder agreement names the index your rate follows, often prime, plus a margin on top. When prime moves, your card rate follows, usually starting with a coming billing cycle. If you pay in full each month, you barely notice. If you carry a balance, you will.
Lines of credit. A business line of credit is often priced as prime plus a margin. When prime changes, so does the interest on whatever you have drawn.
Equipment loans and leases. Many equipment loans carry a fixed rate. If yours does, a Fed move does not change what you already owe. It changes the quote on your next oven, truck or chair. Leases have a rate built into the payment too, even if no one calls it that.
Other variable loans. Some SBA-backed loans and some real estate loans have rates tied to a base rate such as prime. Your loan note says which kind you have.
Your savings. Rates on business savings and money market accounts tend to drift the same way, though banks are not always quick to pass changes along. A cut can mean less interest on your cash cushion.
Here is how the math works on a variable line. Say you have drawn $50,000 at prime plus 2, and prime rises a quarter of a percentage point. Your rate rises a quarter point too, which adds about $125 a year in interest on that balance. A cut of the same size saves about the same. These numbers are only an example, so run your own.
Tip: Make a one-page list of every loan, line and card you have. Write down the balance, whether the rate is fixed or variable, and what it is tied to. When the Fed moves, you will know in a minute what changed.
Where you feel it later
The slower path runs through your customers.
When rates rise, borrowing costs more for everyone. Shoppers carrying card balances have less room to spend. Big purchases people tend to finance, like a new furnace, a kitchen remodel or a major car repair, can get pushed back. When rates fall, some of that pressure eases, but not overnight.
These effects build over months, not days, and they mix with everything else going on, like jobs, prices and the season. Do not expect a rate cut to fill your store next week.
If you offer customer financing through a partner, ask whether its terms or approval rules change when rates move. That can affect how many big jobs you close.
What to watch
- Decision day. The Fed posts a statement on its website after each meeting. You only need the headline: up, down or unchanged.
- Your bank’s prime rate. Check your bank’s website or ask your banker the day after a decision.
- Your next statements. Look at the rate on your card and credit line statements, and make sure the change matches what you expected.
- Sales of financed items. If you sell big-ticket items, watch how many quotes turn into jobs over the following months.
What to ask your banker
- What is my line of credit tied to, and what is my margin over it?
- Is there a floor or a cap on my rate?
- When does a change in prime show up on my account?
- For my next equipment purchase, what are the pros and cons of a fixed rate versus a variable one?
- Is there a penalty if I pay off or refinance a loan early?
- Has my business changed enough to ask for a better margin?
- What does my cash earn here, and are there other accounts I should look at?
Before you pay down debt, refinance or move money, talk it through with your banker and your accountant. The right move depends on your cash flow, not on the headline.
What to do this week
- Make your one-page list of loans, lines and cards, with “fixed” or “variable” next to each.
- Find the index and margin for each variable one in your agreements.
- Book 20 minutes with your banker and bring the questions above.
- Look up the Fed’s next meeting date on its website and put it on your calendar.
- If customers finance what you sell, start tracking quotes and closed jobs by month.