How a Recession Can Affect Business Loan Rates

Business loan rates are the interest rates charged on moneys temporarily given from business loan lenders to business loan borrowers. Like most other interest rates, determining the value that business loan rates will be in the future or why they are the value that they are in the present is complex, difficult, and based on a multitude of factors. One important determining factor for interest rates is whether the economy is booming, stable, recessionary, or in a depression. The reason that the state of the economy is important is because, depending of the state, certain policies which affect interest rates will be enacted in order to increase or decrease the flow of money in society.   

Recessionary Monetary Policy

Monetary policy is a tool used by the United State's Federal Reserve. During a recession the Federal Reserve may enact expansionary monetary policy. Expansionary monetary policy is meant to increase society's flow of money which, in turn, is meant to increase spending, decrease unemployment, and increase investment. It is a way to stimulate the economy. One way to increase spending is to make the cost of money less expensive. This means lowering interest rates. Interest rates are the amount that a person, bank, or other entity must pay for money that is being borrowed. Generally speaking, the power of the Federal Reserve to lower one specific interest rate, called the Federal Funds Rate, is what makes it less expensive for banks to borrow money from other banks.

Federal Funds Rate and Loan Rates

Like many other market interest rates, business loan interest rates usually reflect the Federal Funds Rate. If it is less expensive for banks to borrow from banks, then banks have the freedom to charge less to lend out money to commercial borrowers. Clearly, by charging less on money, commercial lenders are hoping to encourage potential commercial borrowers to borrower. During a recession, business loan rates can decrease in order to make it more affordable for more people to put more money into their pockets.      

Low Business Loan Rates and Expansion

No matter the state of the economy, starting and operating a business is expensive. Most business owners make use of business loans. If business loan rates are low, more people can afford to invest in businesses. As more businesses are created and established, more people are required run these businesses and, therefore, more jobs are created. As the rate of employment goes up, more people are receiving wages and more people then have money to spend. With more money in their pockets, people can afford to buy more goods. The businesses that started the whole chain of positive events benefit because more people can afford to purchase these businesses' goods and services. Other businesses benefit because people have more disposable income to spread around. The entire economy benefits from a commercial borrower's increased ability to obtain money from commercial lenders.