Monday, April 14, 2008

Know Your Rates... Or It Will Cost You!

What do I mean by the above subject?

Many times I meet with new business owners that do not understand how rates are calculated. The more experienced and sophisticated business owner will know how much his/her loan will cost. Here is what you need to understand, know and where to find the following information.

Consumer Rates/Business Rates can be found daily in the Money & Investing section of the Wall Street Journal, in the Financial Times it is located in the Companies & Markets section and in any other newspaper it is located in the Business section. Next, look for a box titled "Bonds, Rates & Yields" the title may change from paper to paper and here is the information that you will need:

Prime Rate

What is the Prime Rate? The Prime Interest Rate is the interest rate charged by banks to their most creditworthy customers (usually the most prominent and stable business customers). The rate is almost always the same amongst major banks. Adjustments to the prime lending rate are made by banks at the same time; although, the prime rate does not adjust on any regular basis. The Prime Rate is usually adjusted at the same time and in correlation to the adjustments of the Fed Funds Rate. The rates reported below are based upon the prime rates on the first day of each respective month.

Prime rate is the "Base" that banks use to charge their clients when they request a loan. For example: A banker tells you that your loan will be "Prime + 3" what does it mean? Well, we need find out what is prime. Currently Prime is 5.25%, now, the rate on your loan will be 5.25 + 3 which will be 8.25% how do you know this is a good rate? you will need to compare it with another bank. You will have to compare this rate with other banks in order to find out which is the best rate. There are cases when a lender will give Prime minus 0.25% or Prime minus 1% this is usually given to the best of the best of their clients.

As a business owner this is the most important rate you will need to know and understand so that you are not taken to the cleaners.

You can always contact me if you have any questions: