Asset Based Loans For Companies, Nationwide!

Asset Based Loans For Companies, Nationwide!

As a Placement Agent, Huntington Coast Capital has placed over $12,000,000 in new asset based loans through August of 2023! We have seen increased interest in debt consolidation, business acquisition, supply chain/purchase order financing, and contract financing loan requests.

If your business is burdened by high interest rate debt, or if you have a growth opportunity that requires additional financing, we can help! 

High interest rate debt can kill the financial strength of a company. The ease of access and quick loan approvals can lure business owners in to taking the quick cash without considering the ramifications down the road. A common scenario we see is a company that has taken on 3, 4, 5 (and in some cases more) of the Merchant Cash Advance (“MCA”) loans available in the market, and are now having a hard time getting out from underneath them. Lenders look poorly at business owners who pile on this type of debt. The lender’s concern is that the business owner is not exercising business prudence and are financing themselves out of business. Some advice – if a lender refers to your business as a “merchant”, run the other direction!

A more positive scenario we advise on are companies that need to finance growth opportunities. Whether it’s to finance the cost of additional space (real estate acquisition or tenant improvements), cover the cost of goods to suppliers, or finance the cost of a particular contract, Huntington Coast Capital has you covered!

About Huntington Coast Capital. 

Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.

We consult on a wide range of funding options for business owners throughout the United States in the following areas:

  • Supply chain financing 
  • Contract Financing (covers the upfront cost of mobilization and ongoing working capital needs)
  • Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
  • Lines of credit for working capital needs
  • Specialty Property Financing (gas stations, car wash properties, skilled nursing facilities, hotel properties)
  • Term loans for marketing, hiring staff and general expansion needs
  • Factoring services for accounts receivable financing that also provides for back office credit and collection functions
  • Purchase order financing
  • Asset based loans
  • Business acquisition financing
  • Inventory financing
  • Private commercial real estate bridge loans
  • SBA loans for business and real estate needs

Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. To your success!

Purchase Order Financing Versus Letters Of Credit

Purchase Order Financing Versus Letters Of Credit

Paying suppliers is a required and continuous expense for business owners whether you’re in retail, own a restaurant or are a manufacturer or distributor. Cost of goods sold is the first deduction against gross revenue on any companies income statement. The lack of ability to pay for the cost of goods expense severely impacts the growth potential of the business. In this article, we are going to look at the difference between purchase order financing and letters of credit and how they are used in business.

Letters of Credit

Letters of Credit (abbreviated “LC’s”) are bank instruments drafted to secure international and domestic purchases. They provide assurances for both the buyer and the seller of the goods. The seller is assured payment as long as the terms within the LC are met. These can include satisfactory inspection and acceptance of the goods at the port, factory or upon arrival to their destination. When the goods are paid for under the LC is negotiated between the parties.

Letters of Credit essentially assure two things: 1) the buyer has the financial wherewithal to make the payment for the goods, and 2) the supplier will deliver the goods as ordered on time. LC’s are opened with both the buyer’s bank and the seller’s bank and work together to assure the performance of each.

Requirements are a bit more strict with Letters of Credit than they are with purchase order financing. The LC has to have underlying collateral that is typically in the form of cash or accounts receivable.

When a company applies for a Letter of Credit from a bank the company must have an equal or greater amount of cash or accounts receivable available once the LC is drawn on. The buying entity needs to demonstrate that they have the financial wherewithal to cover the cost of goods once conditions have been met. The buying entities funds are typically held in a control account (similar to an escrow account) until needed. This control of the funds is necessary to assure the supplier that funds will remain available for payment from the time ordered to delivery and payment.

In this respect, LC’s really are not a financing tool as no monies are actually borrowed but rather set aside for a particular transaction. This form of international trade “finance” is a protection against financial loss on available capital versus new money used to cover the cost of goods.

This form of financing is set aside for more established companies with enough liquid collateral available to cover the expense. Consider LC’s as an insurance against loss of principle versus true outside financing. For more granular details on Letters of Credit click here.

Purchase Order Financing

Conversely, purchase order programs offer financing to cover the cost of goods to suppliers beyond cash and accounts receivable collateral. Startups, companies experiencing high growth and even the majority of established companies often need additional capital. In the majority of cases, the capital needs are larger than the accounts receivable balance or internal cash reserves.

In these scenarios, Letters of Credit would fall short of the financing needs required to cover the cost of goods.

Purchase order financing pays suppliers for materials required for the buying entity’s growth. Clients utilizing purchase order financing sign contracts with the finance partner. There is typically a personal guaranty for the facility that acts as a backstop should the transaction not offer enough support to pay back the line in a downside scenario.

Purchase order finance underwriters focus on three main areas when assessing new funding requests:

  • Financial strength of the customer(s) for which the PO’s are being generated: when purchase order financing is being requested the fund will want to thoroughly understand the credit strength of the underlying customer. For example, if the underlying customer is a nationally known retailer odds of approval are greater. Conversely, if the PO’s are being generated for a “mom and pop shop” with limited to no financial information available, approval is much more difficult.

 

  • Financing strength of the supplier: the source of where the goods are coming from whether international or domestic must also be fully understood. Suppliers are typically larger and more established. Usually, but not always, financial information is available on these companies and information can be verified to give the purchase order finance company comfort in wiring them money for the transaction.

 

  • Transaction history between the parties: It is important to know how long the client has been dealing with a particular supplier. Approval is much easier if there is a long history that can be documented through shipping documents, invoices and bank transactions supporting successful delivery of past orders. Purchase order financing works best when taking a company’s current business cycle from Point A to Point B versus financing orders for an entirely new supplier relationship that has zero past transaction history. This is because there are a number of inherent risks that go with financing first time orders; lack of past, successful delivery of orders, fraudulent supplier claims, capital at risk before performance, to name a few.

Purchase order financing is a line of credit used specifically to cover the cost of goods when capital needs are larger than available internal cash or accounts receivable.

In Summary

If you are an established company with no need to borrow outside capital, a Letter of Credit would be adequate for your needs. LC’s provide assurance against loss of principle by providing a check and balance prior to releasing funds.

Purchase order financing comes in to play when cash needs are higher than internal capabilities.

Both mechanisms facilitate trade financing and move business forward. Which program is best for your company depends on where you fall on the spectrum. To learn more about how Huntington Coast Capital’s purchase order financing solutions can work for you, watch this short video that explains the process.

We provide consultation and secure funds for a broad base of business financing needs. Call 714-719-8966 to learn how these programs can work with you to grow your business!

Purchase Order Financing Versus Supply Chain Funding

Purchase Order Financing Versus Supply Chain Funding

Purchase Order Financing

Supply Chain Funding has been steadily growing in popularity with our clients. Supply Chain Finance programs provide the business owner with capital to cover the cost of goods and make supplier payments.

How does it work?

Finance companies offering this form of financing will look at the business owner’s equity in the business, profitability and growth projections to name a few areas of focus. The credit analysis is slightly different depending on the Supply Chain company you are speaking with. Some set the line amount at a percent of the equity in the business (i.e. 25% of the equity in the beginning raising to 50% over time), and others will base their credit limit decisions on the amount of insurance they can take out on the business, while some have a more subjective approach based on their review of the overall financial picture of the company.

How is Supply Chain Finance different than Purchase Order Financing?

When utilizing Purchase Order Financing, the business owner needs to provide a copy of the purchase order to the lender. The PO copy is the basis for the loan amount being requested and the lender’s collateral. PO finance companies are repaid at the time of delivery to the customer by the company’s factor or asset based loan provider (unless they are managing the total relationship). Purchase order financing is a good source of capital when looking to cover the cost of a specific order of finished goods.

Supply Chain Finance works a little differently. Under this arrangement, the lender will pay the company’s suppliers and then gives the company 30 to 120 days to pay them back through the normal course of business. This type of finance does not need to be specific to any one purchase order for the company. The lender becomes another vendor for the company on their account payable aging. This is a great alternative when the company needs to build inventory for their season or is an online or brick and mortar retailer selling directly to the consumer (no accounts receivable).

Which one is right for your business?

It depends on whether you have specific purchase orders to finance or if you need more of a general line of credit to pay suppliers. Both are great ways to enhance liquidity and each offer the business owner the ability to act with the confidence of a cash buyer. In fact, a good portion of the finance cost can be offset by taking discounts from suppliers for early payment. Utilizing these options are a great way to leverage your buying power and your company’s growth.

About Huntington Coast Capital.

Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.

We consult on a wide range of funding options for business owners throughout the United States in the following areas:

  • Supply chain financing 
  • Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
  • Lines of credit for working capital needs
  • Term loans for marketing, hiring staff and general expansion needs
  • Factoring services for accounts receivable financing that also provides for back office credit and collection functions
  • Purchase order financing
  • Asset based loans
  • Business acquisition financing
  • Inventory financing
  • Private commercial real estate bridge loans
  • SBA loans for business and real estate needs

Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. To your success!

Purchase Order Financing In California

Purchase Order Financing In California

Purchase Order Financing

Facilitating Business Growth Through Purchase Order and Supply Chain Financing

 

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The barrier to growth for most all businesses, especially startup ventures, is cash flow. Banks will tell you that you need two years of profitability (as shown on your company tax returns) before they will consider providing a business loan. If you do manage to qualify for a bank loan, it will almost always be an SBA term loan (one lump sum loan amount usually secured by real estate). These loans do not address the ongoing working capital requirements business owners need to fund purchase orders and other monthly cash flow needs.

This lack of access to capital is the reason the majority of businesses fail within the first three years.

The capital partners we represent have an entrepreneurial approach to lending that opens the door for many to grow their business without the covenants and restrictions of traditional financing! Here are a few examples of recently funded deals:

  • $100,000 Supply Chain Funding Line for a CBD Industry client – a distributor with enormous growth potential needed the capital to fund purchase orders. The initial line provided is $100,000 and will grow as the company’s sales grow. Estimated monthly volume with the financing in place is between $600,000 to $800,000 in monthly gross revenue.
  • $2,500,000 Supply Chain Line for a Home Furnishings Importer/Distributor – an already established company needed additional capital to increase sales. The use of this supply chain line of credit will allow them to grow from $50,000,000 to $75,000,000 in annual gross revenue!
  • $4,000,000 Supply Chain and Factoring Line for an Importer of PPE products – a newly formed entity in the personal protective equipment space needed capital to purchase goods from overseas suppliers. The partners in the business had solid experience and strong relationships on both the supplier and buyer side. The line of credit will allow them to scale their business and meet buyer demand.

About Huntington Coast Capital. 

Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.

We consult on a wide range of funding options for business owners throughout the United States in the following areas:

  • Supply chain financing 
  • Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
  • Lines of credit for working capital needs
  • Term loans for marketing, hiring staff and general expansion needs
  • Factoring services for accounts receivable financing that also provides for back office credit and collection functions
  • Purchase order financing
  • Asset based loans
  • Business acquisition financing
  • Inventory financing
  • Private commercial real estate bridge loans
  • SBA loans for business and real estate needs

Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. To your success!

Patrick Zazueta
Huntington Coast Capital, Inc.
Direct: 714-719-8966
patrick@huntingtoncoastcapital.com
www.huntingtoncoastcapital.comBRE License #: 02090967

Purchase Order Financing For PPE

Purchase Order Financing For PPE

Huntington Coast Capital is proud to have been contributing in the fight against the COVID-19 crisis by providing purchase order financing for PPE products. Our asset based loan programs have secured purchase order financing for much needed supplies. These items include face masks, gowns, gloves, shoe covers and face shields.

Large purchase orders from counties, health organizations and hospitals from across the country have been filled thanks to the availability of capital in this unprecedented time. Without access to capital, supplies would halt and safety of our healthcare workers on the front lines would be compromised.

Purchase Order Financing For PPE

Are you an existing supplier of medical supplies in need of purchase order financing for PPE? Are you in need of additional capital to fill orders from your customers?

In this environment, we have seen huge demand because the order sizes are far too large for the average supplier. For instance, we have seen orders for a couple million dollars to over 100 million dollars. We have access to the capital required to fill these purchase orders.

The Difference Between Bank Asset Based Loans And Private Asset Based Loans

The Difference Between Bank Asset Based Loans And Private Asset Based Loans

Huntington Beach, CA  Owning a business takes a lot of cash on hand. Cash to make payroll, pay rent (or a commercial mortgage), purchase supplies, marketing and advertising, etc. Business owners reach out first to the bank they have their business deposits with to see if they can provide them with a loan. Their bank is a good place to start, and if they can qualify, their journey ends there.

Different types of asset based loans.

Asset based loans can be made against any asset seen on a company’s balance sheet. The common assets used as a collateral for a loan are real estate loans, equipment loans, inventory and accounts receivable. Other collateral considered assets by a lender are purchase orders and supply chain funding lines.

Asset Based Loans Obtained From Banks. 

Banks provide asset based loans, but have stricter requirements than the private sector. The first difference you will notice is that a bank will most typically require you to open a deposit account with them in exchange for doing the loan. Depending on the size and type of asset based loan, the bank will require you to switch you entire banking relationship over them as a requirement for doing the loan. Switching your banking relationship is no easy or convenient task.

If deposits are not required, that means that the bank will look to fit you in to an SBA loan program. Banks mainly offer term loans under the SBA loan program versus revolving lines of credit. Loans made against accounts receivable, purchase orders or for supply chain funding are not on the menu for most banks.

The preferred type of asset based loan banks like to issue are for real estate and equipment purchases. The range of your required down payment will depend on the type of loan being considered, your business and personal credit and the amount of liquidity you have on hand post purchase. Most banks set their bottom limit at a 680 credit score or better to be considered for an asset based SBA loan.

Private Sector Asset Based Loans. 

In the private sector the whole credit picture is also considered, but not scrutinized quite as closely. The main consideration is the asset quality itself. For example, in an accounts receivable loan, the credit quality of customers, average collection days and historical bad debt write offs are of paramount importance. The private lender will look at business and personal credit scores and evaluate the company’s financial position, however they will also listen to the story. Many business owners have lower credit scores because all of their cash has gone in to their business and this sometimes creates issues meeting their obligations on time. The private asset based lender understands that an asset based loan will improve the company’s cash and allow them the growth opportunity they wouldn’t otherwise have without access to capital. This especially true when considering loans to finance purchase orders or establish a supply chain line of credit.

What Asset Based Loan Is Right For Your Business? 

Our advice is to always check with your business bank first. They are the ones that have the experience with your business and it’s always prudent to confirm their ability to assist.

The facts are that most business owners do not qualify for bank loans. This is the reason there is a market for the private asset based lender. Private capital can be used as a bridge or as a permanent financing for those that prefer less oversight from their lending partner.

What Value Does Huntington Coast Capital Bring?

In a word, experience. We have decades of experience in the private capital and institutional capital markets. We navigate our clients through the options, saving them time and when finding the right asset based lending partner for their business. If your business could use some additional capital to purchase equipment, real estate or to finance growth opportunities, we would like to speak with you.

Call us to learn more 714-719-8966.

Asset Based Loans  The Difference Between Interest Rate and Opportunity Cost

Asset Based Loans The Difference Between Interest Rate and Opportunity Cost

Huntington Beach CA 

What is the interest rate? How much does it cost? What fees are involved? These are some popular questions our clients ask when considering borrowing money to grow their business. These questions are typical when looking to see how much something is going to cost over the long run. However, these questions are more applicable to purchases related to a home mortgage, a car loan, applying for a credit card or other more commodity based financial products.

When considering Opportunity Cost the analysis is much different. For example, if I told you the cost of capital for fulfilling multiple $100,000 orders is 20%, you may say “that’s too expensive!” However, when you take a closer look at it, the true funding costs may be only 6% to 7% per order less early payment discounts. The borrower makes substantially more money than the cost of financing if the margins can support the cost.

Here is an example of a typical analysis we take our clients through. It’s a simple way to determine if financing is right for your business.

  • A purchase order is received from a customer and the cost of goods is $100,000 (your cost or wholesale cost)
  • Your gross margin on this sale is 60% (your sales price to the customer is $160,000)
  • Your financing cost is 6.5% of your wholesale cost for 120 day funding or $6,500 ($100,000 multiplied by 6.5%)
  • The gross profit calculated after financing cost is $53,500 on this order ($60,000 profit minus $6,500 in finance cost)

The question becomes, “would you spend $6,500 to earn $53,500?” Most all of us would agree that is a worthwhile opportunity. There are some variables that can effect these numbers both positively and negatively. For example, if your company has high fixed costs, this will chew in to the profits. On the contrary, if you are able to negotiate a discount for early payment to suppliers (i.e. a 2% discount for payment in 10 days, expressed as 2%/10 net 30) it will have a positive effect on profits.

Keep in mind that this is one sale and each additional sale will have a better net earnings ratio. This is because fixed costs typically stay the same and more profit gets kicked to the bottom line as more sales are realized. An example of where this analysis doesn’t make sense is if a company has out of control fixed expenses or super slim margins as seen in the electromics industry. In our experience, this analysis pencils out for most of our clients.

We always encourage our clients to look at how much they stand to make versus solely focusing on cost. The lender also needs to earn a return and if expectations are managed, business owners can grow their companies and earn more as a result.

About Huntington Coast Capital. 

Huntington Coast Capital secures funding for companies in a broad base of industries. Our clients come to us to find a more flexible lending partner to meet their growth needs. Many are declined by the bank and are in need of a more creative and entrepreneurial funding solution.

We consult on a wide range of funding options for business owners throughout the United States in the following areas:

  • Supply chain financing 
  • Equipment loans and lease programs (learn more about our equipment loan platform offered through our subsidiary)
  • Lines of credit for working capital needs
  • Term loans for marketing, hiring staff and general expansion needs
  • Factoring services for accounts receivable financing that also provides for back office credit and collection functions
  • Purchase order financing
  • Asset based loans
  • Business acquisition financing
  • Inventory financing
  • Private commercial real estate bridge loans
  • SBA loans for business and real estate needs

Whether you are a startup or established, in need of $100,000 or $10,000,000 we have the capital partners to meet your needs. Contact us to see how we can assist in taking your business to the next level. To your success!

Asset Based Loans Versus Bank Loans. Which Is Better For My Business?

Asset Based Loans Versus Bank Loans. Which Is Better For My Business?

Huntington Beach, CA: Our clients come to us with an asset based loan or financing need that almost always is required in order to grow their business. If you are like most business owners, cash flow is tight and if you receive a big order outside the normal course of business, it could be challenging coming up with the cash to cover the cost of goods and deliver the product. Your cash need could also be to finance additional equipment and require an asset based equipment loan in order to meet the increased capacity required to fulfill a contract.

Traditional banking places the emphasis on the cash flow and financial strength of the company, the borrower. They are primarily concerned with how financially solid the company they are lending to is. This is good practice, and it makes sense that the companies that the banks deal with are in good financial health. The obstacle to clear however, is that most companies are leveraged to a high degree and can not meet all of the required ratios banks look for when making a credit decision.

If your company is growing quickly and every dollar is going back out the door to cover ongoing working capital needs, it is likely that you will not meet all the requirements of bank lending. For example, banks look at the leverage ratio of the company. This ratio is figured by dividing the total debt of the company by the equity of the company. Equity being the total assets minus the total liabilities. If you have more than 3 or 4 times the liabilities as you do equity, banks will shy away from offering you more credit for fear that your profits and company cash flow will not be able to pay off the new debt. Again, a prudent way to look at things, but the problem is that most borrowers do not qualify.

The advantage to bank lending is the cost. If your company can qualify, then banks will be able to offer the lowest borrowing rates.

The other option are asset based loans. Asset based loans have a broad spectrum of categories. An asset based loan can be used for commercial real estate purchases, inventory loans, equipment loans and purchase order financing to name a few. In an asset based loan, the lender is looking at the asset being used as collateral in the transaction. For example, if your company received a large purchase order and needs additional cash to pay the upfront costs or deposit required by the supplier, and asset based loan is a good option. The asset in this instance is the purchase order itself. Purchase order financing is often accompanied by a factoring loan. Factoring loans are asset based loans secured by the invoice sent to the customer versus the purchase order sent to the supplier. For more information on factoring loans click here.

In our experience, business owners are qualified for asset based loans more often than bank loans. We explore each option as appropriate and the obvious choice is always revealed in the end. Our clients like the unbiased consultation and industry insight we bring to the table. Because we are not lending our own money and acting in a consultant capacity, we are able to align ourselves on your side of the table and deliver the best options for you and your funding needs. Additionally, in the majority of cases, our services are free to our clients. Our lender network compensates us for bringing them asset based loan opportunities.

If your business would benefit from an asset based loan or equipment loan, give us a call. My direct line is 714-719-8966.

To your success!

What Is An Asset Based Loan?

What Is An Asset Based Loan?

Huntington Beach, CA: The term asset based loan is widely used to describe a loan secured against an asset of value as security for the money borrowed. Huntington Coast Capital has been securing asset based loans for our clients in California and across the nation since 2010. Asset based loans consist of loans secured by commercial real estate, inventory, accounts receivable, purchase orders or equipment. Below is a brief summary on how we have assisted our clients in securing asset based loans in California and across the United States in these different categories.

  1. Commercial and investment real estate. Companies that lack sufficient business collateral are often required to pledge outside collateral as an abundance of caution in this type of asset based loan. Often referred to as bridge loans, these loans usually have terms of 6 months to 3 years and are offered through private money capital providers. These asset based loans are offered in California and throughout the country.
  2. Inventory loans. For companies in the manufacturing, distribution, wholesale and retail spaces, inventory represents cash tied up in goods for sale. Inventory can be used as security in an asset based loan. Depending on the type of inventory however, a loan may not be available. For example, if a company is selling fresh fish, meat or poultry, finding an asset based loan will likely not be possible due to the quick turn of this type of product and the potential for spoilage. Other forms of inventory such as t-shirts, tires, dried goods and other products with long shelf lives have a much better chance of being accepted as collateral for an asset based loan.
  3. Accounts receivable and purchase orders. These two assets represent an amount owed and an order for shipment. Both of these asset types qualify for an asset based loan. In fact, these two asset classes are the most popular asset based loan being requested from our clients in California. Companies in search of improved working capital utilize their accounts receivable as collateral for an asset based loan and their purchase orders as collateral when looking to obtain funding to cover their cost of goods to suppliers.
  4. Equipment loans. Asset based loans used to purchase or refinance equipment are for a specific purpose. Retail sector companies such as restaurants are big users of equipment loans as well as companies in the manufacturing sector. Often times in business acquisitions, equipment loans provide a portion of the funds required for the purchase if the equipment is currently owed free and clear and has a usable life of over 10 years.

Asset based loans are vital to the economy and provide funds to companies when more traditional finance programs can not meet the need. If you are a California company in search of an asset based loan or are located anywhere in the continental United States and looking for financing to take advantage of growth opportunities, consider an asset based loan.

Need assistance navigating the capital markets? That is our specialty and we are eager to help. For advise and counsel on asset based loans or any other form of business financing, give us a call 714-719-8966.

To your success!

Patrick Zazueta
Huntington Coast Capital, Inc.

How Will A Rise In Interest Rates Effect Business Owners?

How Will A Rise In Interest Rates Effect Business Owners?

Things That Traditionally Increase When the Fed Increases Interest Rates

The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:

  • The Prime Rate: A hike in the Feds rate immediately fueled a jump in the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.
  • Credit Card Rates: Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those considered long-term.
  • Savings: Money market and credit-deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings. However, it is possible that anyone with a debt burden would seek to pay off their financial obligations to offset higher variable rates tied to credit cards, home loans, or other debt instruments.
  • U.S. National Debt: A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt. A report from 2015 by the Congressional Budget Office and Dean Baker, a director at the Center for Economic and Policy Research in Washington, estimates that the U.S. government may end up paying $2.9 trillion more over the next decade due to increases in the interest rate, than it would have if the rates had stayed near zero.

Things That Are Largely Unaffected When the Fed Increases Benchmark Interest Rates

  • Auto Loan Rates: Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve’s announcement because they are long-term loans.
  • Mortgage Rates: A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home. However, mortgage rates traditionally fluctuate more in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by inflation rates.

Things That Traditionally Decrease When the Fed Increases Interest Rates

  • Business Profits: When interest rates rise, that’s typically good news for the profitability of the banking sector, as noted by investment giant Goldman Sachs. But for the rest of the global business sector, a rate hike carves into profitability. That’s because the cost of capital required to expand goes higher. That could be terrible news for a market that is currently in an earnings recession.
  • Home Sales: Higher interest rates and higher inflation typically cool demand in the housing sector. On a 30-year loan at 4.0%, home buyers can currently anticipate at least 60% in interest payments over the duration of their investment. Any uptick is surely a deterrent to acquiring the long-term investment former President George Bush once described as central to “The American Dream.”
  • Consumer Spending: A rise in borrowing costs traditionally weighs on consumer spending. Both higher credit card rates and higher savings rates due to better bank rates provide fuel a downturn in consumer impulse purchasing. (For more, read How Interest Rates Affect Spending.)