Interest Rate Environment and Financial Partner Selection: From the Desk of Rick Dennen

March 19, 2025 — Today, the Federal Reserve elected to keep the Federal Funds rate at the 4.25-4.50% target range. This decision comes amid an uncertain economic landscape with multiple factors influencing the rates environment and market conditions. Despite these challenges, the economy remains strong and there are many opportunities for business acquisition and investment. To capitalize on current market opportunities, selecting the right financial partner is crucial, and this selection hinges on prioritizing three key factors:

1. Type of Financing – When evaluating financing options, business owners should weigh the pros and cons of SBA vs. non-SBA financing. Below are some general pros and cons:

2. Strength and Stability – Choosing a financial partner that knows your industry and will provide reliable capital and services, even in the face of unexpected circumstances or challenges is important. Talk with your financial partners about their portfolios and research their performance metrics to determine if they are effectively managing risk. A key metric to look for when choosing a financial partner is their capital to assets ratio. Look for a financial partner with a higher-than-average capital to asset ratio (national average is 15.4% as of 4Q2024) and a strong borrowing capacity. And, lastly, a financial partner who is committed to a long-term relationship and servicing support tends to offer more supportive lending practices that prioritize the success of their customers over their own short-term interests.

3. Rate type - The benchmark rate your loan is tied to significantly impacts your borrowing costs. Lenders typically price loans using one of the following base rates plus a spread:

1. 1. 1. 1. Treasury-based rates: These are anticipatory in nature and are already showing signs of decline. Treasury rates more accurately reflect market expectations and investor confidence in future economic conditions.
         2. Prime-based rates: These tend to be more reactive and follow Federal Reserve decisions more directly, potentially resulting in delayed adjustment to changing market conditions.

Selecting a treasury-based rate structure may provide better alignment with forward-looking market trends, particularly in the current environment where treasury yields indicate potential rate reductions in the coming periods. SBA loans are based on the Prime rate plus a spread, while non-SBA loans can be based on either rate type. So, it’s in your best interest to ask potential financial partners how they derive their loan rates.

Selecting a financial partner is not merely a transactional decision; it's a strategic alliance that can profoundly influence your business's long-term trajectory. A dependable financial partner provides not only capital but also strategic guidance and unwavering support, especially during economic fluctuations. Therefore, prioritize partners who exhibit a proven track record of stability, transparent practices, and a genuine commitment to your business's enduring success. The right partner will be an asset that grows in value over time.

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