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The Federal Reserve makes use of interest rate to accelerate or decelerate economic activity. The Fed can decrease inflation and money supply by increasing borrowing costs. On the other hand, lower interest rates stimulate economic activity as well as encourages businesses to expand and hire more employees. As Kavan Choksi mentions, lower interest rates make it less costly for businesses to get loans whose funds can be used for ramping up production, expanding the venture, hiring more employees, and more.
Kavan Choksi briefly talks about how the federal reserve affects business financing
The Fed’s interest rate is responsible for setting the base rate that lenders offer to businesses for discerning types of loans. When the Federal Reserve interest rate goes up or down, so does the APR and factor rate for business loans, as well as lines of credit. The interest rate of a line of credit or business loan plays a huge role in the amount of money a business shall pay for borrowing. Even though the federal interest rate sets the interest rates for both variable and fixed business loans, the borrowers feel the impact in varied ways.
New borrowers of fixed-rate business loans, for instance, shall feel the impact of the rate with the APR, monthly or weekly fee they are offered. However, existing borrowers with a fixed interest rate shall keep the interest rate they had agreed upon while taking on the loan and continue to pay the same amount. Variable rate business loans shall have the interest rate align with the market rate, which implies that borrowers are likely to see their weekly or monthly payment change with the federal rate.
Borrowers who opt to consolidate or refinance their business loans are likely to see changes to their loan terms in line with the federal rate. By choosing to consolidate loans or opt for refinancing when the federal rate goes down would enable borrowers to benefit from a lower market rate. It may lower their payments, and the sum they pay as interest over time.
As per Kavan Choksi, it is possible for lower federal interest rate to even increase the odds of business loan approval, as the borrower shall take on less in borrowing costs. The monthly or weekly payment will be lower with a lower interest rate, thereby making the loan relatively less risky for the borrower and lender in comparison to a loan with a high interest rate. Lower interest rates would make it easier for businesses to borrow more funds. As less weekly or monthly payment is dedicated to interest, businesses would be able to take on a larger loan while keeping the same payments.
In September 2024, the Federal Open Market Committee (FOMC) opted to slash the Fed funds target by 50 basis points (bp) to 4.75–5.0%. The interest rate cuts led to an increased lending appetite among traditional lenders, as lower interest rates help in rebalancing the portfolio. Lower interest rates would also lead to reduced interest payments for small businesses and positively impact their earnings in the short term.
