After eleven rate hikes, the Fed has finally began to lower interest rates. As of December 18, 2024, the Fed Target Rate is 4.5%.

The federal funds rate is not a rate small business borrowers pay; rather it affects the rates banks pay each other for overnight loans. Still, other interest rates in the economy typically change when it changes. (More about how this works below.)

“The U.S. economy is in a good place…and we want to keep it there,” said Chairman of the Federal Reserve Board Jerome Powell in comments today. He anticipates further rate cuts in the future, but emphasized they will be considered on a meeting-to-meeting basis.

“The U.S. economy is in a good place…and we want to keep it there,” said Chairman of the Federal Reserve Board Jerome Powell in a press conference today. He pointed to a strong labor market and lower inflation in supporting the decision to make this significant rate cut. He anticipates further cuts in the future, but emphasized they will be considered on a meeting to meeting basis. 

“Our job is to support the American economy,” he said, “and if we do it right, the American people will benefit.”

This is considered a big deal, and is a move in a positive direction for borrowers hoping to cut costs. Here’s how it may impact your small business: 

Small Business Credit Cards

Most business credit cards carry variable interest rates, and so most credit card rates will drop. If you are carrying a balance and paying interest, you probably won’t see a significant difference in your monthly payment as a result of this change in rates. But if you keep paying the same amount (and don’t add to your balance), a lower rate means more of your payment goes to interest rather than principal. 

Small Business Loans

If you have a small business loan with a variable interest rate, that rate may come down in the near future. Because this rate cut is fairly small, it may not feel like a big change, but lower rates can help you save money in the long run. 

Many SBA loans carry variable interest rates tied to the prime rate. If you have an SBA loan with a variable rate, your rate will go down. 

Tip: As rates drop, it may make sense to refinance your small business loan. If your business qualifications (including business credit scores and/or revenue) have improved, you may be able to find a lower-cost option. 

Business Checking and Savings Accounts

If your business bank account pays interest, you may see the APY (annual percentage yield) drop a little. Since most business checking accounts don’t pay a high interest rate, changes will probably be modest. 

Tip: Make sure you’ve chosen the right business checking account and business savings account for your business needs. 

Of course, small business owners are also consumers, and they may see interest rates on their personal credit cards, auto loans, mortgages and student loans go down. 

How Fed Rate Cuts Affect Other Rates

The Federal Open Market Committee (FOMC) has 12 members; the seven members of the Board of Governors and five of the 12 Reserve Bank presidents. It schedules meetings every six weeks or so, and can hold other meetings as needed. 

As the Fed itself explains, “By law, the Federal Reserve conducts monetary policy to achieve its macroeconomic objectives of maximum employment and stable prices.” It does this in part by adjusting short-term interest rates. 

The FOMC doesn’t control interest rates directly. Instead, it sets a target for the Federal Funds Rate, and banks negotiate with each other. The Federal Funds rate often does serve as a benchmark for other rates in the economy.  

Most notably, the prime Rate, the interest rate banks offer to their most creditworthy customers, is often tied to the Federal Funds Rate.

Key points to understand about the prime rate:

1. It’s typically about 3 percentage points higher than the federal funds rate.
2. When the Fed lowers the federal funds rate, the prime rate usually follows.
3. Many variable-rate loans for consumers and businesses are tied to the prime rate as an index. 

The relationship between these rates is often straightforward. When the Fed lowers the federal funds rate, the prime rate typically drops by the same amount. This change often happens within a day or two of the Fed’s announcement.

The rate on a variable rate credit card (if you carry a balance with interest) will likely drop in the next 1-2 billing cycles. A loan with a variable-rate loan will likely drop at the next scheduled adjustment, which could be the following month, quarter, or even year, in a few cases. 

How to Get Lower Interest Rates

Most companies that offer small business loans and financing set rates based on risk. The less risky your business is, the more likely you are to qualify for a better rate. Factors they often consider include:

• Credit (business credit scores, personal credit scores, or both)
• Revenue and/or cash flow
• Time in business

You can’t control rates. The best way to help your small business get better rates is to focus on the factors you can control. You can do that by building strong personal credit, establishing strong business credit, and by working to bring in revenue and improve cash flow.

Nav can help with a comprehensive suite of tools to help your business build a financially healthy business. (CPT call out)