On September 16, the Federal Reserve announced that it’s keeping interest rates unchanged, leaving the federal funds rate at a range of 0 to 0.25 percent. This announcement did not come as a surprise and it followed the Fed’s July decision to hold rates near zero until the economy has weathered the effects of the coronavirus.
Fed chair Powell also announced the Fed’s intent to maintain rates at near zero through 2023. This announcement extends by a year the Fed’s prior estimate of its policy.
The Federal Reserve has taken other steps to keep interest rates low. The Fed has injected hundreds of billions of dollars into the financial system via repurchase agreements, in which banks exchange securities for cash for a preset time period. The Fed has also been buying Treasury bills at a higher rate, which it will hold on its balance sheet. And it’s also announced an unprecedented, unlimited bond-buying program.
All those actions mean low interest rates are here to stay for the foreseeable future.
The ultimate goal of the Fed’s low rate policy is to make borrowed capital cheaper in order to encourage more money into the economy, so businesses can invest, consumers can spend, and businesses can borrow. The central bank started this round of lowering federal funds rate in March when COVID-19 was first recognized as a severe adverse effect on the U.S. economy.
Many personal and business borrowings with variable rates are based on the prime rate, which is very closely related to the federal funds rate, for example credit cards, business line of credit and home equity line of credit. The same is true for variable rate SBA loans.
If you’re thinking of expanding your business or start a new business, now is the perfect time to take out a loan and lock in these lower interest rates. If you have significant outstanding debt this could also be a good opportunity to refinance your existing loans, which can help stabilize your finances.
Right now under COVID-19 SBA loan is still one of the best financing options for small businesses. There are six types of SBA loans and the most common ones are SBA 7(a) and SBA 504 loans.
- – SBA 7(a) Loans: This is the most popular SBA loan program. These loans are offered in amounts up to $5 million and can be used for working capital, refinancing debt, or purchasing a business, real estate, or equipment. The SBA 7(a) loan rates depend on a variety of factors, such as your credit score and the length of the repayment term, and it could be fixed or variable. The SBA limits the rate that lenders can charge for an SBA 7(a) loan with a maximum rate set at 0.25% to 3.25% over prime rate.
- – SBA 504 Loan: This program provides loans to small businesses looking to purchase or build owner-occupied commercial real estate. The program pairs two lenders together to fund these projects: a bank or traditional lender and a community development corporation (CDC). The two loans involved in the SBA 504 loan process will have different rates, terms, fees, and limits.
Other SBA programs include SBA CAPLines (a revolving line of credit with interest payment only on the borrowed amount), SBA Export Loans (for companies doing international trade), and SBA Microloan (a program provides funds to nonprofit intermediary lenders who in turn lend to for-profit small businesses). The last type of SBA loan is SBA Disaster Loans, such as PPP loan and EDIL loan that are widely popular during the current COVID-19 pandemic.
If you have a good business with positive cash flow, now is a good time to borrow because of the historical low interest rates. Please reach us if you have the borrowing needs. We can connect you with the right SBA lender or other alternative lenders for small business.
Helen Liu is the Principal Broker and President with Sunbelt Business Advisors. She can be reached at (408) 436-1900, or at [email protected]. Or connect with Helen on LinkedIn.