The Fed announced at the start of 2018 that interest rates may see at least three increases over the course of the year. With rising business loan interest rates, entrepreneurs are looking elsewhere to find capital to launch, maintain, and grow their businesses.
Why Business Loan Interest Rates Are Rising
On the surface, the increase in business loan interest rates may not make sense. Unemployment is low, the economy is very strong, and consumers are not afraid to make large purchases. The reason for the spikes in business loan interest rates is compensation for the Great Recession from a decade ago. In an effort to stimulate the economy and give people more purchasing power, banks kept interest rate very low. Simultaneously, banks protected themselves against risky investments by raising the requirements for loans. While recovery was not an overnight success, the strategy worked, but now banks are raising interest rates on loans to make up for lost time.
How Businesses Are Reacting
Even during the Great Recession, new and small businesses were thinking outside of the bank to find adequate funding. While interest rates were lover over the past few years, requirements were prohibitively high. Now, both business loan interest rates and requirements are going up, leaving businesses to turn to alternative solutions. Some entrepreneurs took to funding their businesses out of pocket. The obvious drawback to this method is putting personal savings and equity on the line. Others have sought financing from friends and family, which ends up straining or breaking formerly close relationships if there is disagreement on how to run operations. There are other options as well, such as angel investors, peer-to-peer lending, and a whole host of lenders claiming to be better than traditional loans.
A Smarter Funding Method
The truth is that business owners would rather avoid debt completely than subject themselves to fluid interest rates. To solve this issue, business owners are leveraging receivables to get the financing they need quickly and efficiently. Invoice factoring converts unpaid receivables to cash without placing debt on the books. Rather than take out a loan, businesses can boost cash flow and work on growing operations. The fast turnaround means entrepreneurs do not have to wait for revenue to trickle in before acting on growth opportunities.
If you own a business and are wary of getting traditional loans due to projected rate increases, contact the experts at FSW Funding. We specialize in working capital solutions for businesses who want to improve cash flow and get immediate access to capital without going into debt.