Rising Rates are Scary. But What Do They Mean for You?
Estimated reading time: 7-8 minutes
Rising interest rates are back in the headlines.
On September 16th, the Federal Reserve raised the federal funds rate by a quarter point, to a target range of 3-3/4 to 4 percent. The next day, JPMorgan and other large banks raised their prime rates to 7% from 6.75%, according to Reuters.
Because this was the first Fed increase since 2023, the headlines quickly took over. Rates are climbing. Is it a bad time to borrow? Is it a bad time to grow?
The math behind this rate increase tells a story.
For example, let’s say there is a business with a $500,000 variable-rate line of credit priced at prime plus 2%. Before the hike, that line cost 8.75%. After it, 9.00%. The added interest is $1,250 a year, or about $104 a month.
That is a real cost. But it’s also a different number than the headlines might initially suggest.
This article turns rate change uncertainty and news into practical guidance you can use to make borrowing decisions.
First, the math.
Rising rates affect your variable-rate loan
The federal funds rate is the borrowing rate banks charge one another. You never pay this rate directly, but it sets off a chain of events.
Banks set their prime rate (the benchmark they use to price loans) in line with the federal funds rate. And many banks set it about three percentage points above the top of the Fed’s target range.
Because many variable-rate loans and lines of credit are priced at the prime rate plus a spread (a fixed markup the lender adds on top of prime, like 2 percentage points), when the prime rate moves, those loans move with it. Since the range now tops out at 4%, the prime rate becomes 7%.
Business loans with fixed rates are untouched by this movement, since the rate you signed is the rate you pay for the life of the loan. A rate increase would only affect a fixed-rate loan if you were shopping for a new one.
That gives you the first question to answer: Is your debt fixed or variable?
If it’s fixed, the September increase changes nothing about what you owe today. If it’s variable, you can calculate the change in about five minutes. Here is what each quarter-point move adds in annual interest on a fully drawn variable-rate balance:
| Balance | +0.25 pt | +0.50 pt | +1.00 pt |
| $250,000 | $625 | $1,250 | $2,500 |
| $500,000 | $1,250 | $2,500 | $5,000 |
| $1,000,000 | $2,500 | $5,000 | $10,000 |
Set your own “interest rate tripwire”
Once you’ve run this math, do the step many owners skip: decide in advance how much added annual interest you can absorb without changing anything else.
That’s your tripwire. Pick the dollar amount now and check it against the table. If a full point move crosses it, you know where to act, whether it’s paying down the balance, locking in a fixed rate, or building a larger cushion.
A tripwire matters because no one can say with confidence what the Fed will do next and you don’t want to be left guessing if another increase comes down the road.
Get practical: borrow, wait, or grow
Now that you know your tripwire, when rates increase, run it through three questions.
- Does a full point cross our tripwire?
Use the stress table and the number you set above. If a one-point increase on your variable-rate balance would put a dent in your cash flow, you may want to think about addressing that first. A 90-day cash buffer is one way to give yourself room to absorb it.
- What does waiting cost us?
This is the question rate headlines don’t ask. Delay has a cost, too.
Suppose a $400,000 expansion project is expected to return 20% a year, or $80,000. Waiting six months to avoid a possible quarter-point increase forgoes about $40,000 in projected return. If the full $400,000 were borrowed for those six months, a quarter-point increase would add roughly $500 in interest.
Projected returns are never guaranteed, and every company’s numbers will differ. But the comparison shows why waiting for rates to settle isn’t always the best decision in the long run.
If a project’s returns are strong, a small rate increase is rarely the biggest factor in whether it succeeds. If the returns are thin enough that a quarter-point changes the answer, the project may have bigger problems than the rate.
- Can the expansion fund itself on the way up?
Growth isn’t just a borrowing question. It’s a cash-timing question. Every new order means buying materials, paying staff, and then waiting for the customer to pay. The faster you grow, the more cash sits in receivables. A business can be profitable on paper and still run short on cash while it waits.
That’s why expansion plans that only account for the loan payment tend to underestimate the pressure points and what the expansion will need. If your growth is going to come with longer payment waits, it’s best to plan so you have the cash to cover them.
Waiting can be the right call when:
- A one-point increase would break the project’s math
- The expansion depends on a single customer or a single contract that isn’t signed yet
- You have variable-rate debt you can’t comfortably carry at higher rates
Waiting is harder to justify when:
- Customers are already committed and the demand is real
- The return is strong enough that a small rate change wouldn’t alter the decision
- The cost of delay, in lost orders or lost customers, is larger than the interest difference
The point is this: don’t build decisions around a will-they-or-won’t-they Fed forecast. Build them around your own numbers and they will be sturdier.
But first, can you even get the cash?
Interest rates are only half the story: access is the other.
For many small and mid-sized businesses, the harder question beyond price is whether a loan is available at all.
That was UFT Canada’s problem. The company had products in high demand and a business that was growing, but the banks still wouldn’t lend. The obstacle wasn’t a rate. It was a short financial history.
Without traditional funding, the company needed another way to fund its growth.
They began to look for alternative options, like invoice factoring. UFT began receiving cash for its invoices within 48 hours of invoicing, about 60 days sooner than customers normally paid. Later, once it could provide two years of financial statements, a bank offered them a $1 million line of credit.
That’s obviously only one client’s experience. But the point here is while a rate change might affect borrowing costs, it doesn’t solve every obstacle to getting a loan. If your business is growing faster than its financial history, the question should not be whether the Fed will move again, but how to fund growth in the meantime.
When rates rise, you have alternatives
When rates rise, the usual reaction is to look for a cheaper loan. Sometimes that’s the right move. But rates are only one part of the picture, and for some businesses, they aren’t the main constraint.
If cash is tied up in unpaid customer invoices, a loan isn’t the only way to address the problem. Invoice factoring is the sale of your receivables, not a loan. A business sells eligible invoices to a factor and receives an advance against them instead of waiting 30, 45, or 60 days for customers to pay. The advance is typically a portion of the invoice, with the balance, less fees, paid out once the customer pays.
Factoring isn’t right for every business. And it doesn’t make an unprofitable business profitable. But for those who are a good fit, it speeds up cash you’re already owed and allows you the working capital to keep your business growing. Purchase order financing and asset-based lending address other parts of the funding cycle.
None of these are automatically cheaper than a bank loan. And none are immune to the economic environment. They’re different tools for different problems: access to funding, the timing of cash, or both.
That’s where a conversation with someone local helps. Each Liquid Capital Principal runs a local business and works with owners directly. They can walk you through your situation and tell you whether factoring, a bank line, or a combination are the right fit.
What to do this week
You don’t need a forecast to get ahead of this. You need an hour and your loan paperwork.
- Pull your loan and line-of-credit documents.
- Note for each rate: fixed or variable, the amount over the prime rate, and how and when the rate resets.
- Run your balances through the stress table above.
- Set your tripwire: the added annual interest you can absorb without changing anything else.
- List your planned draws and expansion spending for the next 12 months.
- Ask your lender whether fixed-rate options are available for any variable-rate debt.
Don’t worry. Just have a plan.
Rate news can feel urgent pretty quickly. But when you slow down and do the math, it brings clarity out of the noise.
Know whether your debt is fixed or variable. Set your tripwire. Compare the cost of waiting to grow with the cost of borrowing. And plan for the cash that growth ties up, not just the interest it adds.
Economic shifts don’t announce themselves. The owners who adjust early keep the most options open.
Start with the number that matters most (your highest variable-rate balances), and then decide what to do with the rest.
If you’d like help sorting out the right funding for your next move, find your local Liquid Capital Principal and start a conversation.
