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Fed Plan Could Drive Business Loan Interest Rates Higher

Business lending could become more expensive or restrictive in the future due to the Federal Reserve Bank of New York’s recent announcement about bond purchases.

Last month, the New York Fed announced that by the end of 2013 and the beginning of 2014 they would likely reduce and then eliminate their monthly bond purchases. Although the reduction will not begin for several months, and relies on the economy acting according to forecasts, the announcement caused mortgage interest rates to increase at a staggering rate.

Although the impact on the housing industry is more apparent, there are other forms of lending that could be impacted, such as business loans. spoke with several lending experts about their predictions for business loan availability and interest rates.

Jeremy Brown, CEO of RapidAdvance, said that while the Fed’s announcement might have some long-term impact, it does not have any significant short-term impact because of the stability of the Wall Street Journal prime rate. This rate is an index used by banks on consumer loan products including business loans. This rate is at 3.25 percent, which is where it has been for over a year.

Unlike interest rates for mortgages, this rate does not change as rapidly and therefore borrowers of consumer loans are less likely to see their interest rates affected by it.

Although Brown predicts that interest rates will increase by 1 or 2 percent, this is not the borrower’s biggest concern.

“The big thing for small businesses is the availability of funds, rather than having to pay an additional 1 or 2 percent,” he said.

Brown said that interest rates are only part of a larger equation for business owners. He said that the demand for business loans is tied to consumer confidence in the economy. When confidence increases, so does the demand for funding.

“It’s more about sentiment and confidence than it is about interest rates. There has to be available capital in order to fuel that growth,” Brown said.

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