The recent Federal Reserve meeting occurred on May 6-7, 2025—the third meeting of the year—and the Fed kept the federal funds prime rate unchanged at 4.25% to 4.50%.1 By maintaining a steady rate, the Fed seeks to balance economic growth and address pressing concerns such as inflation, international trade tariffs, and employment levels.
Whether you're looking for a working capital loan, a Small Business Administration (SBA) loan, or financing options for leasing or purchasing business equipment, understanding the Fed's impact on interest rates is essential. This Huddle Business Capital blog article explains how the Fed's latest rate decision can impact small business borrowing.
The federal funds rate.
The federal funds rate is the benchmark interest rate for overnight bank-to-bank lending in the U.S. The rate is set by the Federal Open Market Committee (FOMC), which is the policymaking sector of the Federal Reserve System. The federal funds rate influences interest rates charged to business owners and consumers. These include rates for business loans, business lines of credit, home mortgages, auto loans, personal loans, and credit cards, among other types of financing.
When the federal funds rate is high, borrowing is likely to decrease, which can result in slow economic growth. And when the federal funds rate is lowered, borrowing becomes more affordable. This can stimulate spending and investment and promote economic growth.
The federal funds rate vs. actual interest rates.
It is important to remember that the current federal funds rate of 4.25% to 4.50% does not represent the actual interest rates applied to business financing products. Regarding business financing—such as business loans, lines of credit, equipment financing, and other financial products—the interest rates can vary significantly and often include double-digit interest rates.
These variations depend on several factors, including your business's creditworthiness, the loan's term, market conditions, and the specific lender. Therefore, you should consider these elements when evaluating your financing options.
Business borrowing costs.
As mentioned earlier, the federal funds rate impacts the interest rates associated with business borrowing. The federal funds rate is the base rate that lenders offer business owners for financing, such as working capital loans, small business loans, commercial loans, and funding to lease or purchase business equipment. When the federal funds rate rises or falls, so does the annual percentage rate (APR) for these business financing products.
If you secure business financing with a fixed rate, you won't have to worry about the possibility of the federal funds prime rate increasing or decreasing. Instead, you will have predictable payments with a fixed rate, making it easier to budget expenses. On the other hand, business financing with a variable interest rate can change over time. If the prime rate increases, your monthly payments will also rise.
Business financing approval.
One significant advantage of a low federal interest rate is that it can increase the chances of being approved for business financing. This is because lower interest rates result in reduced borrowing costs. Specifically, a lower interest rate translates into lower payments, which is less risky for the business owner and lender than business financing with a high interest rate.
Conversely, it can be challenging for business owners to get their financing applications approved when the federal interest rate is high. A high interest rate often increases borrowing costs, making it more difficult for business owners to secure the necessary funds for their companies.
Sizing up the current rate.
The current federal funds rate of 4.25% to 4.50%—set on December 18, 2024, and kept on May 7, 2025—is down 25 basis points from the previous rate of 4.50% to 4.75% on November 7, 2024. A 25 basis point is 0.25 percentage point. It is worth noting that the federal funds rate has gradually decreased since July 26, 2023, when it was 5.25% to 5.50%. The last rate hike made by the Fed also took place on July 26, 2023.2 The federal funds rate reached 20.61% on June 15, 1981, the highest rate in its history.3
If you are wondering if the current federal funds rate of 4.25% to 4.50% means it is a good time to apply for business financing, you are not alone. Many business owners nationwide are grappling with the same question, and there is no right or wrong answer. Ultimately, it depends on your business's specific financing needs—both short-term and long-term—as well as your revenue, cash flow, and budget.
What lies ahead for interest rates?
The next Federal Reserve meeting is scheduled for June 17-18, 2025, and many experts are closely watching for indications of the Fed's decisions regarding interest rates. Should the Fed choose to pause interest rates for a fourth straight session (dating back to September 18, 2024) or lower rates, this could lead to lower business borrowing costs. However, if the Fed raises rates, it may result in higher business borrowing costs.
If you are looking for short-term business financing options and want the peace of mind that comes with a fixed interest rate and predictable payments, Huddle Business Capital is the perfect teammate. Let us help you navigate the options available to secure the funding necessary for your business's growth and success.
Sources.
1 - https://www.federalreserve.gov/economy-at-a-glance-policy-rate.htm
2 - https://www.forbes.com/advisor/investing/fed-funds-rate-history/
3 - https://www.macrotrends.net/2015/fed-funds-rate-historical-chart
Disclaimer.
This Huddle Business Capital blog article is purely educational and contains general information and opinions; it is not intended to provide advice or recommendations of any kind. Huddle Business Capital is not affiliated with nor endorses the Federal Reserve, Forbes, or Macrotrends.
