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Beware of Variable-Rate Loans and Rising Interest Rates

If you’re thinking about financing your business with a loan, you may want to avoid variable-rate loans. Loans have become a popular financing solution for businesses. Research shows that approximately half of all small business owners in the United States have applied for a loan. While a variable-rate loan can provide your business with capital, though, rising interest rates can pose challenges with this financing solution.

Beware of Variable-Rate Loans and Rising Interest Rates

What Is a Variable-Rate Loan?

A variable-rate loan is a form of debt financing in which you borrow money from a lender while paying an adjustable interest rate. The term “variable rate” refers to the interest on the loan. When you borrow money from a lender, you’ll typically have to pay interest on it. The annual percentage rate (APR) may change if you take out a variable-rate loan.

How Rising Interest Rates Affect Variable-Rate Loans

Banks and other lenders will adjust the interest rates on their variable-rate loans based on the federal funds rate. The federal funds rate is a benchmark set by the U.S. Federal Reserve. It’s the interest rate that financial institutions must charge when lending money to other financial institutions. While the federal funds rate is aimed at financial institutions, it has a trickle-down effect that affects all borrowers, including business owners and consumers.

As a business owner, you can expect to pay more for a variable-rate loan as the federal funds rate increases. A high federal funds rate means that financial institutions will have to pay more to borrow money from other financial institutions. In turn, these same financial institutions will typically raise the interest rates on their variable-rate loans to compensate for the higher borrowing costs.

Alternatives to a Variable-Rate Loan

Rather than financing your business with a variable-rate loan, you may want to finance it with a fixed-rate loan. The U.S. Federal Reserve has been raising the federal funds rate in 2022, resulting in higher interest rates.

With a fixed-rate loan, you don’t have to worry about paying more interest fees. Fixed-rate loans still have an interest rate, but the interest rate won’t change. It will remain the same throughout the term of the loan.

You can also choose a completely different form of financing for your business. Instead of a loan, you can use equity financing. Equity financing is an alternative form of financing that involves the sale of equity to an investor.

This article was brought to you by Intrepid Private Capital Group, a Global Financial Services Company. For more information on startup and business funding, or to complete a funding application, please visit our website.

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Intrepid Private Capital Group • July 29, 2022

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