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How Fed Funds Rate Increases Affect Business Acquisition Loans

If you’re thinking about borrowing money to buy a business, it’s best to move quickly before rates go up again because Interest rates on SBA guaranteed loans are tied to the Prime Rate which is tied to the Fed Funds Rate.

The Fed Funds Rate was raised by 0.75% to the range of 1.50% – 1.75% effective June 16, 2022.  The Federal Open Market Committee (FOMC) will meet again the last week of July to determine if another rate increase is needed in order to help curb inflation.  Since inflation is currently very high, many expect the FOMC to increase the Fed Funds Rate by another 0.5% to .75% in July.

The Fed Funds Rate is the interest rate at which depository institutions actually lend balances at the Federal Reserve to other depository institutions overnight. 

The Prime Rate is usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate.  In recent history, the Prime Rate has been set at 3% over the high end of the range for Fed Funds (which is 1.75%).  As of June 16th, the Prime Rate is 4.75%.  The chart below shows a history of the prime rate since January 2019, when the Prime Rate was 5.5%.

The Prime Rate is the interest rate charged by most banks to their most creditworthy customers and is almost always the same amongst major banks.  Most banks use the Wall Street Journal (WSJ) Prime Lending Rate since the Wall Street Journal surveys large banks and publishes the consensus prime rate.

The maximum interest rates allowed on SBA guaranteed loans (loans guaranteed by the SBA but not provided directly by the SBA) are tied to the Prime Rate.  The maximum interest rate allowed on most SBA 7(a) loans (7 years or longer, over $50,000) is Prime Rate + 2.75%, currently 7.5%….which is 1.5% higher than it was earlier this year.

With interest rates rising rapidly, anyone needing a business loan is encouraged to get started on the process of obtaining a loan as soon as possible.  If you want some assistance with the process through our Loans4Biz program, contact us now.

The Loans4Biz program saves participants time and money by offering the following benefits:

– Assistance with gathering and completion of documents required by most lenders

– Initial communication with all lenders managed by the Loans4Biz program manager

– Much better chance of finding a lender who is interested in providing a loan

– A number of financing options and scenarios presented for consideration

– Thousands of dollars of interest saved over the full term of the loan

Although the Loans4Biz program was created to assist buyers of businesses listed by CBI, the benefits of using the Loans4Biz program are available to anyone who needs assistance with financing…whether or not you are buying a business listed by CBI. To learn more about the Loans4Biz program, contact Kelly Tivis @ 479-770-8989 or [email protected]