UPDATED: What Would a Fed Rate Increase Mean for SBA Lending?
LOS ANGELES, CA (PR Newswire) UPDATED: DECEMBER 2, 2016 – Many speculate the Federal Reserve is set to raise the base interest rate for banks. What will be the impact on SBA lending?
We will follow this story for our clients, business partners and friends. Meanwhile, please review our article on this subject published just about this time last year. (Maybe a hint for what’s to come?)
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LOS ANGELES, CA (PR Newswire) DECEMBER 18, 2015 – Fed gives banks 25 basis points for the holidays. What is the impact on SBA lending?
The Takeaway: “Growing economy, business expansion and continued low unemployment lead to Fed rate hike – Banks make more lending money at a higher interest rate so will be more willing to lend.”
What is the federal funds interest rate?
The federal funds interest rate is the interest rate that banks and credit unions lend funds maintained at the Federal Reserve to one another.
Why did the federal funds interest rate increase?
chet@yoursba.com
In her opening statement, Janet Yellen, Chair of the Board of Governors of the Federal Reserve System, stated that the federal funds interest rate hike “marks the end of an extraordinary seven year period,” a time in which we experienced the “worst financial crisis and recession since the Great Depression”.
Over these seven years, we have seen much improvement: countless jobs have been restored, incomes and household spending have drastically increased, and the housing sector has significant improved.
With a 5% unemployment rate and the economy back on the upswing since the recession, the increase in the federal funds interest rate is the first step toward a normal monetary policy. Yellen stated that the increase is intended “to keep the economy moving along the growth path it’s on.”
What does the increase mean for SBA lending?
SBA 7(a) loan interest rates are determined by the lender, with the SBA setting a maximum interest rate composed of a base rate plus a maximum allowable spread. The base rate can be based off three different indices: the Wall Street Journal published Prime rate, the London Interbank One Month Prime (LIBOR) or an SBA Peg rate.It is important to note that the while the Fed does not control any of these three indices directly, the changes in these rates tend to follow suit with changes in the federal funds rate. Historically, the WSJ prime rate – the most commonly used SBA loan base rate – has been about 3% above the federal funds rate. The WSJ prime rate is defined by the Wall Street Journal as “the base rate on corporate loans posted by at least 70% of the 10 largest U.S. banks.” As of December 16, 2015 this rate has remained unchanged at 3.25% since 2008. Less than a day after the federal funds interest rate increase, nine of the ten largest U.S. banks have already increased their prime rates from 3.25 to 3.5%: JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, U.S. Bancorp, BB&T, SunTrust Banks, PNC, and Fifth Third Bancorp.
Commercial Lending Impact
Randy Gehres, Senior Account Manager for Western Union Business Solutions and YourSBA.com advisory board member explains, “When interest rates rise, financial institutions and banks may not be as tight when qualifying loans. They may loosen loan requirements because rates are higher and fewer candidates will qualify.” It will be more important than ever when we evaluate business cash flow for lending purposes that we consider the increase in monthly loan payments.Joe Wojtowicz, SBA Loan Director for YourSBA.com with over 40 years of commercial lending experience says, “Because SBA loans have 10-year to 25-year amortizations, monthly payments will not increase as much as conventional loan payments and will be easier on cash flow.”
Non-regulated lending companies were not around during the last fed rate change, so we do not know the impact a wholesale rate range will have on these companies.
Bottom line
We would like to thank you for helping us achieve our best year ever. Together, we have helped countless entrepreneurs realize their dream of owning a business. Let’s remember:
We would love to hear from you if you have any questions or would like to learn more about how using the SBA 7(a) loan program qualifies more buyers and increases your revenue. YourSBA.com helps borrowers navigate through the intricate and sometimes frustrating SBA loan process.
About YourSBA
Contact: joe@yoursba.com
Contact: randy.gehres@westernunion.com
