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Interest Rates for Small Businesses

According to a loan officer at a local bank with strong ties to the community, a small business can expect an interest rate of 10.25 percent today. This is based on the prime rate of 8.75 percent at the bank plus a percentage for the risk associated with loaning funds to a small business. The prime rate is the rate that institutions charge their best customers, which are those who have the lowest amount of risk associated with their transactions. Since the business in question does not have a history with the bank and, as a small business, presents some amount of risk in this transaction, the bank is adding a premium to the transaction.

The prime rate that a bank charges is based, in turn, the discount rate or the federal funds rate; these are rates that are charged by the Fed to member banks, or the rates that member banks charge each other for overnight transactions. These rates are not available to individual bank customers. The prime rate represents the minimum amount of profit which the banks realize since it is what they charge their customers over and above what they are paying for funds. The logic continues as the risk associated with transactions increases as customers become smaller and more diverse, and the transactions associated with them become greater. That the bank is willing to consider a loan to a small business at all is testament to its commitment to the community and its willingness to work with small businesses in the community.

In the current economic climate, the rate is not unattractive for a successful business, but there are alternative ways of raising capital. Securing a loan enables a company to increase its capital base without diluting its equity through issuing stock. Since this is a small business, it is likely to be privately held, and issuing stock, while a way to raise capital, would eliminate the company's private ownership. It may also be difficult to find buyers for the equity issu...

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Interest Rates for Small Businesses. (1969, December 31). In LotsofEssays.com. Retrieved 11:40, March 29, 2024, from https://www.lotsofessays.com/viewpaper/1712940.html