The Sky is Falling (or is it)?
The Federal Reserve increased interest rates again. How does this recent hike impact business owners?
Have you heard the news? The rates are rising! The rates are rising! The Prime Rate is now 7.5%.
Prime Rate is now 7.5%
In an effort to quash inflation, the U.S. Federal Reserve has been steadily raising the federal funds rate, which acts as a reference rate for banks and other lenders. In 2022 they raised the federal funds rate seven times for a total increase of 425 basis points. This in turn caused the prime rate, which is the rate charged by most lenders, to increase to 7.5%.
But how does this impact business owners? Banks and other lenders still want to lend money, so business owners can still borrow to fund their working capital and capital expenditure needs. It is just more expensive to borrow now than it has been in the recent past. For each $1,000,000 of borrowing, it will cost the business $42,500 per year more than it did last year. Look up in the sky. You may see some snowflakes or rain drops falling, but the sky isn’t falling. The business press sensationalizes everything they can so you will keep reading, listening, or watching, but rates have simply returned to more modest levels from the historically low rates we have had over the last 15 years. In December 1980 rates were as high as 21.5%. The chart below provides some perspective and shows that rates remain low compared to historic levels.
During all those years of higher rates the U.S. GDP increased almost every year and good businesses continued to have strong performance. Business owners should ignore chicken little and keep their eye on the ball, make sound business decisions, and endeavor to profitably grow their businesses.
Just because the rates are rising, it doesn’t mean the sky is falling.
If you're a business owner in need of equity or debt to grow your business or need an M&A Advisor to help you sell your company or make acquisitions, Waypoint Private Capital can help.
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Steve Sprindis is co-founder and managing director of Waypoint Private Capital. © 2022 Waypoint Private Capital, Inc. All Rights Reserved.