On the back of the coronavirus issues and its impact on the economy and financial markets, the Federal Reserve has taken a few aggressive measures to try and delay a financial crisis. For companies that need access to capital, how will those moves impact business loan rates?
First, they announced that they would restart what has been called quantitative easing program that was used during the Great Recession. That program involves buying hundreds of millions of dollar in assets, like mortgage-backed securities. Doing so injects liquidity into the economy.
Second, the Fed lowered the benchmark interest rate to 0%.
On Monday I talked about the Small Business Administration’s Economic Injury Disaster loan program and how the access to capital may improve during this period.
While these moves are all intended to improve liquidity and access to capital that does not mean that business loan rates will drop to zero. In fact, business loan rates may not drop much at all.
The important thing to note about the Fed’s benchmark rate is that it is the rate at which banks borrow from one another. The Fed does not set other rates such as mortgage loan rates or business loan rates.
So, while the move to a zero percent benchmark rate might indirectly lower small business loan interest rates by making borrowing cheaper on lenders, you should not expect that those rates will force others dramatically lower. In fact, should these financial challenges force more businesses into delinquency or bankruptcy then we could see lenders raise rates in some instances.