How the Fed Rate Cut Impacts Small-Business Loans

The Federal Reserve cut the federal funds rate by a quarter of a percentage point on Sept. 17, a move that could lower borrowing costs for small businesses with variable-rate loans and new financing needs. The Fed’s decision came largely as a result of the weakening job market, and marked the first rate cut since December 2024.

For business owners, this cut may offer some relief on the cost of small-business loans, but actual savings will depend on your loan type, lender and qualifications.

The federal funds rate, also known as the Fed rate, helps shape the prime rate — the benchmark lenders use to determine what they charge borrowers. When the Fed rate drops, the prime rate usually falls too, which often makes business loans less expensive.

With the latest Fed rate cuts, the prime rate decreased from 7.50% to 7.25%. As a result, business owners might see the following effects:

If you have a variable-rate business loan that’s based on the prime rate — such as an SBA 7(a) loan — the Fed rate cut will lower your interest costs and monthly payments.

For example, say you have a $250,000 SBA 7(a) loan with an interest rate of 13.5% and a 10-year repayment term. Your monthly payment would be about $3,807, with roughly $206,823 paid in interest over the life of the loan.

With a 0.25% rate reduction, bringing the interest rate to 13.25%, your monthly payment would drop to approximately $3,770. That’s about $202,367 in total interest — saving you nearly $4,500 over the lifetime of the loan.

Business owners may also see lower rates on business credit cards and lines of credit, both of which often have variable rates. Rates on Wells Fargo’s BusinessLine® line of credit, for instance, have decreased from 9.25%-17.25% to 9%-17%.

Business owners with existing fixed-rate loans won’t see any changes from the latest Fed rate cut. New borrowers, however, may find that lenders are offering lower rates on upcoming fixed-rate loans. As a result, getting a loan now may be more affordable than it was in recent months.

If you have a high-rate loan and are considering refinancing, now may be a good time to explore your options. Although the Fed rate cut doesn’t guarantee that you’ll save money, you may be able to secure a loan with a lower rate — especially if your qualifications have improved. If your business loan profile is stronger (longer time in business, better credit score or higher revenue), refinancing could help you access more favorable terms.

Here are a few things to keep in mind as you evaluate your financing options in light of the recent Fed rate cut:

• Lenders may not lower rates immediately. Although the Federal Reserve has cut rates, lenders may not lower their business loan rates right away. Banks and other lenders often wait to see how the market responds before adjusting rates, so you may need to shop around or wait a little longer to see changes in borrowing costs. (SBA 7(a) lenders are the exception to this, as they are required to adjust their rates in tandem with the prime rate.) 

• Borrowing costs depend on a variety of factors. Not all borrowers will benefit from the Fed rate cut. Although overall rates may be lower, the rate you receive on a loan will depend on your qualifications, as well as your loan type and lender. Stronger credentials will give you access to the most competitive rates.

• It may still be difficult to access bank financing. With ongoing economic uncertainty, banks continue to have tight credit standards for small-business owners. This can make it hard to qualify for the lower rates you want. If you can’t get a bank loan, consider working with a local community lender, which may be more flexible, while still offering competitive rates and terms.

• The Fed may cut rates again this year. If you can wait to get a new loan or refinance an existing one, economists predict the Federal Reserve will cut rates again at its final two meetings of 2025 (in October and December). That could make debt financing even cheaper, giving borrowers a reason to wait.