In this article, you’ll learn:

  • Small business loan considerations when the Fed is raising rates
  • Top small business loans when rates are rising
  • Small business loans to avoid when rates are rising

To combat inflation that is near 40-year highs, the Federal Reserve has turned to a tight monetary policy. In May, the Fed increased the federal funds rate by 50 basis points, pushing the rate to a range of 0.75%-1%. According to CME Group data, the market expects the rate to be 2.75%-3% by the end of the year.

As a small business owner, you may be wondering: why does the fed funds rate matter?

It matters because a higher fed funds rate – or the anticipation of a higher fed funds rate – leads to higher interest rates on small business loan options.

Small Business Loan Considerations During Tightening Cycle

With rates expected to see further increases, you may want to opt for a small business loan with a fixed interest rate – not a variable interest rate – so the interest rate on your loan stays the same as the market-rate moves higher. Besides possible savings, you also get cost-certainty for your business; you know the exact amount of your monthly payment for the life of the loan.

You should also consider your company’s outlook in our current economic environment. For example, you have a business that sells big-ticket items, and more than half of your customers finance their purchases. In this case, you could keep your prices the same, but many customers may still have to make much higher payments due to the higher interest. By considering these types of possibilities, you can determine the best way forward for your business – which may or may not include certain types of small business financing.

What are the Top Small Business Loans When Interest Rates are Rising?

As mentioned earlier, it’s usually best to get a fixed-rate loan when interest rates are expected to move higher. So, when interest rates are rising, the top small business loans have fixed-rate options.

Term Loan

A term loan, which a traditional bank or online lender can offer, provides a small business owner with upfront cash to be repaid at predetermined intervals at a fixed or variable interest rate. There are many possible uses for a term loan, including buying expensive equipment or commercial real estate, purchasing inventory, hiring staff, and refinancing.

With Biz2Credit, you can get a loan amount of between $25K and $500K with rates starting at 7.99%. We have payment plans ranging from 12 to 36 months. To qualify for a term loan, you typically need annual revenue greater than $250K, a 660+ credit score, and at least 18 months in business.

SBA 7(a) Loan

The U.S. Small Business Administration (SBA) 7(a) loan program provides small business owners with a maximum of $5 million of funding, which can be used for commercial real estate, short- and long-term working capital, refinancing current business debt, and purchasing furniture, fixtures, and supplies. With this loan program, it’s possible to get either a fixed-rate or variable-rate loan.

Here are a few reasons why it’s good to use an SBA loan when rates are rising:

  • Lower interest rates: the SBA guarantees up to 85% of the loan amount, so lenders can offer low interest rates due to reduced risk.
  • Long-term financing: the maximum maturities for SBA loans depend on your business needs, but they are typically between 10 and 25 years. Interest rates may continue going higher – and stay higher – far into the future. In this case, a 10+ year loan could be a game-changer for your small business.
  • Fewer upfront requirements: with an SBA loan, you may not have to make a significant down payment or offer a lot of collateral to secure funds.

If an SBA loan sounds like the right fit for your small business, you should check the eligibility requirements before you submit an application, as you have to endure a tough and lengthy loan application process to secure an SBA loan. You have to present several documents and fill out a mountain of paperwork – and you may not hear back for several weeks or months.

Equipment Loan

An equipment loan allows a small business owner to finance business equipment, such as computers, machinery, or vehicles. In many cases, the lender allows the business owner to use the equipment as collateral for the loan, and it’s possible to get up to 100% financing with no down payment – making equipment financing an excellent way to preserve cash in an uncertain economic environment.

The loan term is usually set equal to the expected useful life of the equipment, so a piece of equipment with a useful life of 7-10 years could allow you to lock in the interest rate for a long time. The interest rate you get may or may not be attractive, depending on the lender and your business history. The rate can be anywhere between 8-30%, and there are fixed-rate or variable-rate options.

Business Credit Card

A business credit card in a rising rate environment? In some situations, yes. Some providers offer 0% annual percentage rate (APR) introductory periods lasting between 6 and 18 months.

You should consider taking advantage of one of these offers if you have several large upcoming purchases, and you expect to be able to cover the purchases before the end of the period. For example, you want to buy $50,000 of equipment in the next three months, and you expect operating cash flow to triple over the next six months to $30,000 per month. In this case, the 0% APR option might make sense.

But if your business needs are spread out over the next 5+ years and/or you don’t expect to have the cash to cover your purchases before the expiration of the introductory period, you should use a different small business financing option.

Merchant Cash Advance

A merchant cash advance (MCA)  provides a small business owner with a lump-sum payment (cash advance) to be repaid through future sales. The provider uses a factor rate with an MCA – not an interest rate – to determine how much the borrower pays back. The lump-sum payment is multiplied by the factor rate (typically between 1.2 and 1.5) to get the amount of money to be repaid. The payments are based on either an estimate of your future sales or your actual future sales.

The “equivalent interest rate” can be on the higher end with an MCA, as the 20-50% factor rate premium is often applied over 3-12 months. But a merchant cash advance is a solid option when interest rates are rising for a few reasons:

  • Fixed factor rate: if market rates continue moving higher, you still pay the same factor rate.
  • Easy to qualify: qualifying for an MCA is possible without good credit.
  • Unsecured: you might not have to provide collateral.

What are the Small Business Loans to Avoid When Interest Rates are Rising?

With rates expected to increase, you want to avoid – or at the very least, not rely on – small business loans with variable interest rates.

Business Credit Card

Yes, a business credit card is on both lists. If you’re not using a card during a 0% APR introductory period, a business credit card is a poor option when interest rates are rising.

In the early days of the COVID-19 pandemic, it wasn’t easy to find a low-APR business credit card – and that’s when rates were near zero and expected to stay near zero for the foreseeable future. Credit card APRs are likely to move even higher with the Fed increasing rates.

You are under no obligation to use a business credit card if APRs move higher, so it’s not a bad idea to have a business credit card in your toolbox. But if that’s your only option, and market rates continue marching higher, you could put your business in a precarious position.

Business Line of Credit

A business line of credit allows a small business owner to borrow what they need when it is required and only pay interest on the amounts borrowed. Like a credit card, there is a limit on the amount that can be borrowed. The available capital is usually subject to annual review.

With a business line of credit, you don’t have to specify a particular use for the loan. So, the flexibility in how it is used coupled with the flexibility in the timing makes this small business financing option an excellent option for business owners with uncertain needs.

You typically need to have a 580+ credit score, 12 months in business, and $10,000 in average monthly revenue to qualify for a business line of credit with an online funder. So, many small business owners can meet the standards.

But here’s the issue when rates are rising: a business line of credit often has a variable interest rate. As with the business credit card, it’s risky to rely on this small business funding option in our current economic environment.

The Bottom Line

Since the onset of the COVID-19 pandemic, U.S. businesses have faced several difficulties. In 2020 and 2021, they had to take measures to keep customers and employees safe from the virus and deal with supply chain issues, among other things. While the virus has become less of a threat in 2022, inflation has skyrocketed, and the Fed is raising rates, bringing a whole new set of challenges for small business owners.

It’s not an ideal situation, but as a small business owner, you have to control what you can control. Using the right type of business loan for your small business increases the chances of you weathering the storm.

While it’s likely a good idea to get a loan with a low, fixed interest rate when rates are rising, you also want to quickly get financing, as there is a lot of uncertainty in the weeks and months ahead. With Biz2Credit, you can get funded within a few business days of approval. Angel Cabrera, who has an electrical business, worked with Biz2Credit – he was approved for funding on Friday, and he had funds in his account by Monday.

Learn how Biz2Credit can help your small business secure funding.

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