A business that draws on its credit line to make payroll before customers pay their invoices is borrowing at a rate that can change. The Federal Reserve's next decision is the one most likely to change it.
The Fed's target range for its benchmark rate is 3.75 percent to 4.00 percent. The Fed raised it by a quarter point at its September meeting and held it in July and October, Reuters reported. The next meeting is Dec. 8-9, and a quarter-point increase is widely expected, according to Reuters.
Variable rates move
Many business lines of credit and business credit cards carry variable rates. Those rates are usually written as the prime rate plus a margin. Banks set the prime rate relative to the Fed's target range. When the range goes up, the prime rate generally follows, and so does the rate on the line.
That change reaches the balance that is drawn, not the credit limit. A line with nothing drawn costs nothing in interest no matter where the prime rate sits. A line carried at a steady balance month after month costs more after each increase.
The calendar matters. A business that draws on the line for a few weeks each quarter, to cover payroll or inventory while receivables come in, pays the higher rate only for those weeks. A business that has been rolling the same balance for a year pays it every month.
Fixed rates do not
A fixed-rate term loan already on the books does not change when the Fed moves. The rate was set when the loan was made, and it stays there until the loan is paid off or refinanced.
That is the practical split for most small firms: one part of the debt bill responds to the Fed, and one part does not. Knowing which is which is the first step in working out what a December increase would cost.
A Treasury yield is not a bank quote
The 10-year Treasury yield rose to 5.105 percent on Thursday, Nov. 12, its highest since Oct. 21, Reuters reported. The 2-year yield rose to 4.867 percent. Those are the rates at which the U.S. government borrows. A bank's quote to a small business is a different number, set by the bank, with its own margin on top.
The Treasury moves still matter. They show where markets expect the Fed to go. Fed funds futures priced in 29 basis points of increases for December on Thursday, with slim odds of a half-point move, according to Reuters. Markets expect a quarter-point increase in December and another in January, Reuters reported.
What Fed officials are saying
Fed officials have given reasons to expect more than one increase. Waller earlier this week seemed to favor a half-point increase given hot October consumer price data, Reuters reported.
Hammack, of the Cleveland Fed, has argued for a slower pace. "If we go steadily in smaller increments, more frequent, smaller rises, it's easier for businesses and households to manage around that," she said, according to Reuters.
Checking the paperwork
For an owner, the useful documents are the loan and card agreements themselves. They state whether each rate is fixed or variable, which index a variable rate follows, the margin above that index, and how often the rate resets.
With those in hand, a December decision is not a surprise on the statement. It is a change in one line of the agreement, applied to whatever balance the business is carrying when it takes effect.