Interest Rate Increases for Business Loans in 2022: What to Know

The American economy is on the path to improve, so the Federal Government announced an interest rate hike to ease inflation. Read on to learn about how the interest rate increase may or may not affect your business.

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How are interest rates calculated?

A loan’s interest rate is calculated by multiplying the loan's periodic interest rate by the periods in a year in which the rate is applied. Interest rates do not include charges on top of the loan such as closing costs and application fees. A loan’s APR can be calculated when factoring in these types of additional charges.

PRO TIP: Work with your accountant or another financial professional to crunch the numbers. This can help you estimate timely payments for the life of the loan and can help determine if your use of proceeds can help you reach your goals.

A Fed interest rate change can impact your loan payments

When the Federal Government announces a rate increase it is important to be aware because it can impact interest rates and APR, which in turn impacts payments. But that impact doesn’t have to hurt cash flow.

Here’s an example outlining how an existing variable rate SBA loan payment might be affected. In short, the SBA loan’s 10-year term means variable rate loan payments will not skyrocket.

If a business owner secures a $100,000 SBA 7(a) loan and the interest rate rises from 6.25% to 7.75%, the monthly payment only increases by $78.00 per month. (From $1,122.00 to $1,200.00)

Small business owners always have their eye on the bottom line and this small increase results in a minimal impact to cash flow. Entrepreneurs can still make payroll, launch growth initiatives, and reach goals without a painful financial adjustment. If this new increase doesn’t seem small to you, then you should consider applying for a fixed rate term loan or a SmartBiz® Custom Financing option with a fixed rate.

It’s also important to note that SBA loans from banks in the SmartBiz network have no prepayment penalty, so these loans can be repaid sooner if cash flow allows. This can help you build business credit, letting you borrow more at a lower cost if you need future funding.

The professionals at SmartBiz are available to help you explore funding options from lenders in the SmartBiz network.

For the loan products offered by banks in the SmartBiz network, the current rates are as follows:

SBA Loans 

Amounts offered: $30,000 - $350,000

10-year term

  • Working Capital & Debt Refinance Loans from $30,000 to $50,000 have a variable rate of the Prime Rate + 3.75% - which yields a current rate 7.25%
  • Working Capital & Debt Refinance Loans from $50,001 to $350,000 have a variable rate of the Prime Rate + 2.75% - which yields a current rate of 6.25%*

Bank Term Loans

Amounts offered:  $30,000 - $500,000

Fixed rate loans with a 2-5-year term

Custom Financing (business lines of credit, invoice financing, and business credit cards)

Amounts offered: $30,000 - $500,000

24 - 60-month terms

Fixed or variable rate depends on financing type

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How aggressive will the Fed be in hiking rates in 2022?

Raising interest rates by a small amount gives the Federal Government time to track how the economy evolves.

Federal Reserve Chairman Jerome Powell said that the Federal Reserve would raise rates more aggressively if needed, with the possibility of six more rate increases in 2022.

What does a rate change depend on?

The decision to raise or lower rates is not made lightly. The rate moves can depend on a number of, factors, including:

  • Inflation 

Inflation refers to a general increase in prices of goods and services over time. When the general price level rises, money buys fewer goods and services, reducing purchasing power. Some downward movement is expected as the pandemic and supply chain bottlenecks recede. However, the prospect that inflation lingers for longer is also high, in part because of the global political and economical challenges, including soaring oil prices. We have all felt inflation at the gas pump and at the grocery store recently!

  • Employment Data

Employment Data means information including the name of each employer and the name, ethnicity, gender, veteran status, zip code, and total hours worked and pay of each employee. Many workers are starting to ask for pay increases to account for rising living costs, while a historically tight labor market has led many firms to boost wages.

How can small business owners prepare for a higher rate?

Consider steps you can take to help you protect your business finances and reach your goals in light of the current and future rate hikes. Work with your accountant or bookkeeper to help you choose the right path for your unique business.

Pay down debt: Business owners with fixed rate loans are less likely to experience an impact on payments from a Federal interest rate increase. As interest rates rise, monthly payments will increase for variable rate loans, so if you have a variable rate loan, ensure it has a long term so that as rates go up, you can mitigate the increases to monthly payments. Prioritize paying down debt, especially a high-interest credit card balance. Consider consolidating that debt. Here are articles from the SmartBiz Small Business Blog offering more information on this strategy:

How to Refinance a Business Loan in 7 Steps

Business Debt Relief: How to Handle Small Business Debt

Boost your emergency savings: High inflation shouldn’t keep entrepreneurs from stashing a healthy amount of cash in case of emergencies or unplanned expenses. Learn more about savings strategies here:

Small Business Financing Dos and Don’ts

How to Save Money and Grow Your Business

Stay connected: Entrepreneurs facing a rate hike should live within their means, stay connected to their professional network, identify risk tolerance, and focus on long and short-term goals.

Setting Business Goals: A Comprehensive Guide

Turn Every Event Into a Networking Opportunity

Final thoughts

Taking on additional funds for your business is a big decision. But the old adage, “it takes money to make money”, rings true for small businesses. Proceeds from the right small business loan can be used for working capital, debt refinance, marketing, hiring, and more.

PRO TIP: It’s a good idea to lock in an interest rate before additional hikes are put in place or to secure a variable rate loan with a long term. SmartBiz representatives are available to answer questions you may have about rates, fees, and other loan details. Spark growth and savings by choosing the right option to help you succeed.

WHAT YOU NEED TO KNOW: The SmartBiz® Small Business Blog and other related communications from SmartBiz Loans® are intended to provide general information on relevant topics for managing small businesses. Be aware that this is not a comprehensive analysis of the subject matter covered and is not intended to provide specific recommendations to you or your business with respect to the matters addressed. Please consult legal and financial processionals for further information.

*SBA loans offered from banks in the SmartBiz lending network have a variable rate of Prime Rate plus 1.5% to 3.75%.

**Interest rate on bank term loans and custom financing depend on loan term and the applicant's credit and financial profile.

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