In 2025, the Federal Reserve Bank has steadily decreased the federal funds rate. For business owners like you, this means you’re collecting a lower annual percentage yield (APY) on your interest-bearing checking account, but also paying a lower annual percentage rate (APR) on your business line of credit. Does the latter balance out the former? It depends on your business’s funding needs and how you manage cash flow.
What you need to know
- The Federal Reserve is lowering interest rates in 2025 because inflation, as measured by the Consumer Price Index (CPI), has been low.
- The 2025 rate cuts make the APR for business loans, lines of credit, and credit cards cheaper, making borrowing more cost-effective and incentivizing economic growth.
- Despite the gradual decreases, interest rates remain relatively high, so you can make use of high-yield interest accounts to grow your idle savings.
Federal funds rate vs. prime interest rate
The federal funds rate and prime interest rate are two interest rates that affect the national economy. They’re closely related but not identical—here’s the difference:
- The federal funds rate is set by the Federal Reserve, and determines how much banks charge each other for borrowing and lending money.
- The prime interest rate is set by banks, and determines how much banks charge you to use their services.
The prime rate is directly influenced by the federal funds rate. As the federal funds rate decreases, so will the prime rate. This means that the recent federal interest rate decreases will make it cheaper for you to use a business line of credit or loan. The Federal Reserve’s intention when lowering the interest rate is to encourage business owners like you to invest in your business, stimulating the economy.
How does inflation affect the federal funds rate?
Inflation is an increase in prices for goods and services. It’s measured in the United States by the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI). The CPI is expressed as a percentage and released monthly to measure price increases on consumer products and services over the previous twelve months. In July 2025, the CPI was just 0.2%.
The Federal Reserve Bank decreases interest rates to increase the rate of inflation, and vice versa. The idea is that lower interest rates increase demand, because it becomes more affordable for businesses and their customers to afford spending and borrowing money.
There are ways small business owners can combat inflation themselves, including using data analytics to make strategic decisions about pricing and more.
What do low interest rates mean?
Interest rates were historically low during the 2020 pandemic and throughout the early stages of the economic recovery that followed. That facilitated cheaper borrowing for small businesses, which was part of the intent in keeping rates low. Of course, it also meant lower payouts on business checking and savings accounts, somewhat balancing the scales.
There’s also a correlation between interest rates and the stock market. Lower rates mean that the business cost of capital is lower, fueling growth. That can affect your small business directly for obvious reasons, but it can also generate higher returns for firms that have an equity portfolio. The S&P 500 returned 28.41% in 2021 if you calculate in dividend reinvestment.
What do high interest rates mean?
Higher interest rates require a shift in corporate financial management. The cost of business capital is high, so growth can be somewhat limited if your company doesn’t have significant cash on hand. Holding that cash in an interest-bearing business checking account can produce a moderate APY income. Cutting costs can increase that income.
The stock market, as you might expect, typically does not perform well when interest rates are high. That’s evidenced by the year-to-date returns of the S&P 500 in 2022. As of this writing, the index is down 16.97%. That’s not entirely due to interest rates, but they are a significant factor. When borrowing costs are high, business growth and market returns are low.
Direct ways interest rates can impact your business
A decreased cost of taking on debt encourages businesses to borrow, and to use those funds to invest in their business. At the same time, lower APY makes high-yield interest business checking and savings accounts less attractive. Higher interest rates have the opposite effect in both borrowing and saving.
Indirect ways interest rates can impact your business
The Federal Reserve Bank’s strategy on interest rates may increase your business’s bandwidth for taking on debt in the short run. Now that borrowing costs—including credit card rates, business loans, and business lines of credit—are lowering, you’ll have an easier time covering costs for seasonal employment, a space remodel, or increasing inventory for the upcoming holiday season.
While interest rates remain relatively, though, you can take advantage of a high-yield business checking account to maximize your earning potential.
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