FORTUNE Small Business:

Fed cuts pay off for small businesses

The lowdown on how the rate cuts affect small business owners.

Subscribe to Top Stories
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)

Ask FSB
Get small-business intelligence from the experts. Here's a chance for YOU to ask your pressing small-business questions, and FSB editors will help you get answers from the appropriate experts.
Your name:
* Your e-mail address:
* Your city:
* Your state:
* Your daytime phone #:
* Your questions:

(FORTUNE Small Business) -- Dear FSB: How do the Fed rate cuts affect business loans, if at all? Say I take out a loan for several hundred thousand dollars to buy a small business. What criteria is used to set the interest rate on the loan?

- Brent, Houston, Tex.

Dear Brent: The Fed's rate cuts are good for small-business owners seeking loans.

"Small business borrowers will see relief as a result of the feds repeated interest rate cuts," says Greg McBride, senior financial analyst with Bankrate.com. "This is particularly true for borrowers with variable or adjustable rate loans, as those loans can be pegged to indexes such as the prime rate, which moves in step with the federal interest rate and the LIBOR - the London Interbank Offered Rate. That's a rate at which banks pay to borrow from each other that is used as a global interest rate benchmark."

Since many small-business loans are variable-rate loans, as the Fed cuts rates and the prime rate goes down, they become more affordable, says George Harrop, Chief Executive Officer of Mainstreet Lender, a Chevy Chase, Md., non-bank lender specializing in the needs of small-business borrowers.

"It's a benefit to small business owners because it means they'll be spending less of their cash flow on servicing the loan, and in the eyes of the lender, they become a stronger borrower, because less of their money goes toward paying the loan and more goes toward running the business," Harrop said.

When lenders set rates for borrowers, they're seeking to manage risk, says Harrop.

"Risk is being viewed through a different lens now than in recent years," says McBride. "It's tougher to obtain credit, and credit will come at a higher price now that some sanity is returning to the lending environment. Borrowers banks perceive as riskier - those that pose a higher likelihood of delinquency or default either due to previous late payments or other financial difficulties - can be expected to pay higher interest rates."

If the business is already established, or if the borrower has a history of successfully repaying loans, that will also affect their rate, says Harrop.

"Banks are interested in a relationship, [not] a transaction," says Alfred F. Luhr III, senior vice president of business banking at M & T Bank in Buffalo, N.Y. "The more you can bring a relationship to a bank - your personal account, home mortgages, any kind of business you have - it will help with the rate."  To top of page

Photo Galleries
These 10 food trends could dominate 2015 So long, kale. Here's what's expected to shake up the food industry next year. More
Beyond Russia: Geopolitical hot spots in 2015 Investors beware: These 5 global crises are likely to rattle the stock market and world economy. More
These 20 antique guns could fetch big bucks Morphy Auctions in Pennsylvania is putting nearly 1,000 old guns on the block. Here are just a few. More

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.