How Do Corporate Credit Cards Work? (Answered)

Corporate Credit Cards Explained

For millions of professionals, a company card is an essential financial tool when navigating the business world. Many employees see the company card as a perk of professional employment because it provides access to cash and credit to fund all manner of business endeavors.

Companies use corporate credit cards to give employees the option to charge authorized business expenses to their business bank account. Such expenses could include flights, hotel stays, restaurant bills, transportation costs, and other business-related costs.

Corporate cards for employees usually carry the name of the company and the name of the employee designated as the cardholder. In this article, we’ll answer the question ‘what is a corporate card?’ and then discuss the different types of corporate cards, their benefits, and how they work.

What is a Corporate Credit Card?

Corporate credit cards are credit cards given to employees by their employer. These cards allow you to charge authorized business expenses to your company rather than receive reimbursement on a later date. Employees benefit by using corporate credit cards as it means they don’t have to use their own cash for business-related expenses.

These corporate cards are designed to make it much easier for employees (and their employers) to manage and monitor expenses. Many of these credit cards offer lucrative perks, such as access to airport lounges and frequent flyer air miles, as incentives for using their services.

Types of Corporate Credit Cards

There are many types of company cards available for businesses. Depending on which corporate credit card you choose, either the employer or employee is responsible for clearing the credit card bill. 

With individual liability cards, the employee is responsible for paying the credit card issuer directly for any charges accrued. Once paid, the employee must file an expense report for reimbursement from their employer. For these cards, employee credit history is checked before approval. 

Alternatively, with corporate liability cards, the employer foots the bill for any approved charges. As the company is responsible for paying the bill, individual employee credit eligibility will not be checked before their card is issued. 

Before using a corporate credit card, you should find out who is responsible for covering the bill each month. If you are responsible, we recommend setting up a system to automate payments when they’re due. Plus, you’ll need to ensure that you have the funds to cover the balance, even if you’ll eventually get reimbursed.

How Do Corporate Credit Cards Work?

Let’s use the American Express corporate card as an example of how corporate cards work:

Small business owners, entrepreneurs, and large organizations have multiple options when it comes to credit cards. However, the use of AMEX corporate cards is preferred by most of the larger corporations in the USA. American Express provides six different corporate cards, each with its own benefits, offerings, and fees.

So how does the Amex corporate card work? AMEX corporate cards are ‘charge cards,’ which differ from regular credit cards. When you use AMEX, you won’t pay any interest. But, you have to pay off any outstanding balance in full every month. AMEX designed their corporate cards for U.S.-based companies with gross annual revenues of $4 million or more. For this reason, AMEX approval is based upon the creditworthiness of a business instead of relying on an individual employee’s personal credit. 

Once AMEX has approved your company for a corporate card account, you can give copies of the company card to employees and executives. Generally, the Human Resources or finance department deals with authorizing and processing the cards and issuing them to employees and managers. Depending on the terms your business negotiates with AMEX, employees may or may not be liable for credit charges.

Benefits of Corporate Cards for Employees

  • Expense Management

Traditional approaches to expense management can leave employees paying expenses out-of-pocket for lengthy periods. This can have a detrimental effect on retention rates and team morale, especially if there are trust issues around honesty between employers and employees. Corporate cards mitigate this issue by giving automated expense management services and full transparency on all transactions. 

  • Reduced Expense Fraud and Increased Compliance

If it’s evident that an individual member of the team has been faking their expenses, a corporate card can end this fraudulence. The finance team will have complete details for all transactions, putting an end to the possible expense loopholes that your employees have been abusing. This can be great for team morale as all employees will know that they are being treated equally and fairly.

Get a Business line of Credit Approved Today

Here at L3, we can help you access a business line of credit to support corporate credit cards and manage company spending.

A business line of credit (LOC) is a small business loan that offers revolving credit access. Similar to a credit card, you can access a LOC for a specified time limit. During this time, you’ll have the options to draw, repay, and redraw cash from your credit limit. Additionally, you’ll only pay interest on the amount of money you withdraw.

Apply for a secured business line of credit today.


Brewery Start-Up Costs – Securing Financing | L3 Funding

How Much Does it Cost to Start a Brewery?

Breweries are among the most robust and exciting businesses to start. Although COVID-19 has disrupted many industries, the alcohol industry has remained profitable throughout 2020 and into 2021. Brewery startup costs vary depending on location, size, and the type of (and how much) beer or ale you plan to brew. 

Suppose you love craft beer and want to turn your favorite pastime into a profitable business. In that case, you’ll probably have questions like:

  • How much money do you need to start a microbrewery?
  • What are the initial beer brewery setup costs?
  • What is the overall cost to start a brewery?

In this post, we’ll discuss the advantages of opening a brewery, the startup costs for a brewery, and small brewery equipment prices. We’ll also share a range of financial tips. So, budding brewery enthusiasts read on to find out how much to start a brewing company with and more.

Why Open a Brewery?

In 2019, although overall U.S. beer volume sales dropped by 2%, craft brewer sales increased by 4% in volume. Rental dollar sales of craft increased by 6% to $29.3 billion, accounting for over 25% of the U.S. beer market.

People love craft beer. There’s something unique about seeing how a product is created. As a result, many microbreweries showcase their brew spaces to craft-loving fans, creating a memorable experience for beer lovers.

Additionally, brewing beer combines art and science. There is a lot of passion involved in crafting your own unique beer, from brewing to bottling and branding. Once the patrons of your brewery see how much work goes into the process, they are likely to support your brand and your business journey. And then once you develop strong brand imaging, you’ll end up with lifelong customers. 

Although microbreweries can harbor high startup costs, the alcohol industry is relatively recession-proof and can be wildly profitable for savvy entrepreneurs.

Equipment and Product Costs

How much does it cost to start a brewery? To correctly answer this question, we need to consider equipment and production costs.

Again, the price you pay for brewery equipment depends on whether you buy new or used and how big your brewery will be. Small capacity brewing equipment (1 barrel that holds 31 gallons of beer) will cost $100,000 new, or less if you purchase second-hand equipment.

However, if you want to start a colossal brewery, you can pay close to $1,000,000 for a new 30-barrel system. Next, you must factor in the cost of brewing essentials such as kegs, fermentation tanks, canning and bottling lines, storage tanks, beer labeling machines, tap handles, waste treatment systems, and refrigeration equipment.

So how much does it cost to start a microbrewery? According to Wired UK, you can set up a microbrewery for as little as $70,000. However, they estimated these costs based on renting your equipment instead of buying brand new machines and apparatus.

Facility and Construction

When calculating how much to start a brewery, your monthly rent will depend on your building’s size and location. Plus, you’ll probably be asked to cover the first month’s rent and a security deposit when you sign the lease with your landlord. 

You’ll then have construction costs, which can be substantial as you convert the building to make it suitable for brewing beer. You’ll need to consider electrical needs, plumbing, and whether the ceilings are high enough to house fermentation tanks. As a general rule of thumb in the brewing industry, you should double your equipment costs to estimate how much you’ll spend on construction for your building.

Other Costs to Consider

When pondering: ‘How much does it cost to start a brewery?’, you may overlook certain fees. For example, you’ll need a decent composite floor that’s able to withstand temperature shock, impact shock, and acidic spillage from beer. These can cost over $10 per square foot.

Unfortunately, beer spillage is a natural byproduct of the brewing process, and specialist flooring is necessary to protect the cement from eroding due to the beer’s acidity. Additionally, you’ll need to purchase all the required permits and legal documentation to brew beer in your state. Although most of these permits are free, they often come with a long processing time. Since time is money, you must factor this wait time into your budget.

Tips for Financing Your Brewery

There are many ways that we can help you to finance your first brewery or microbrewery, including:

SBA Loans

The SBA provides financial assistance for SMEs that are struggling to raise capital. As an official SBA partner, we can help you access their funding quickly and efficiently.

Merchant Cash Advance

Cut out lengthy processing times by applying for a capital cash advance via our website. 

Unsecured Loans

Quick access to capital could speed-up the process of starting your craft brewery. 

Work with L3 Funding

When you work with L3 Funding, securing finances for your business has never been easier. By completing four simple steps, you can be approved for the merchant funding you need. Contact us today to learn more about our services. 


Pop-Up Store Budget – Securing Financing | L3 Funding

How Much Does It Cost for a Pop-Up Shop?

Whether you’re a well-known franchise or a young entrepreneur bursting with ideas and creativity, pop-up shops could be a valuable asset for your business. Temporary store franchising has soared in popularity over the last decade, with some of the world’s biggest brands like Amazon and Facebook, opening their very own pop-up franchises.

As you plan your pop-up business, you’ll probably have questions like:

  • How much to rent a pop-up shop?
  • How much is the average pop-up store budget?
  • Are there any pop-up shops near me that I can visit for inspiration?

In this article, we’ll discuss the concept of temporary stores, things you must consider before you open a pop-up shop, pop-up costs, and financing options for people looking to invest in a pop-up venture.

Pop-up Shop Concept 

How much does it cost for a pop-up shop? We’ll answer this question shortly! First, let’s define the concept of temporary stores. 

Pop-up retail, otherwise known as ‘flash retailing’ or ‘pop-up shops,’ is the trend of opening short-term sales or promotional spaces that last for days or weeks before closing down. These temporary stores are often part of PR campaigns to promote a new product, service, or event. However, they can also be constructed to boost brand awareness in a critical location.

Pop-up retail is beneficial to landlords, customers, and retailers alike. They can increase sales, offer more choices to consumers, boost brand awareness, provide revenue for landlords, and give retailers the flexibility to travel with their brand as they choose.

What to Do Before You Open

There are several vital steps to consider before you open your pop-up store.

  1. Planning

You must have a clear objective of what you want your pop-up store to achieve. So, you should consider the primary purpose of your venture. Are you hoping to get new business? Test your products out? Increase brand awareness? Launch a new line of products? Answering these questions will help you to move forward.

  1. Budget

You’ll need to set a clear budget and calculate your return on investment before you begin your pop-up project. We’ll discuss how much it costs to open a pop-up shop shortly.

  1. Location

Where will you base your pop-up shop? What city or neighborhood will provide the best location for your business to achieve its goals? Take footfall, branding, and customer behavior into consideration when finalizing this decision.

  1. Utilities

Will you need gas, water, electricity, or internet access? If so, you may want to choose a location somewhere close to the grid. The majority of rentals include utilities in their price, but it never hurts to double-check.

  1. Design and Marketing

You can’t expect your pop-up store to succeed without some intentional marketing strategies. How will your pop-up store look, and how will you let people know it’s there? Will you use social media? Will you incorporate online and offline marketing to reach a wider audience? 

Once you’ve answered all of these questions, you’ll have a solid plan to follow as you prepare your pop-up venture.

How Much Does It Cost for a Pop-Up Shop?

The golden question: Exactly how much to open a pop-up shop?

Duration, size, and location are some of the factors that will determine the total cost of your pop-up store. There is no limit to how much you can spend; however, you can open a budget pop-up experience for as little as $1,500.

Retail analytics firm Popertee estimated the overall cost of a 30-day pop-up store at around $33,000. Inkbox, a temporary tattoo brand, found similar numbers. They opened a pop-up store back in 2016 and spent $18,000 over fourteen days.

Ensure that you collect several estimates from different landlords and providers before finalizing your decisions about your pop-up store.

Financing Your Pop-Up Shop

There are several ways that we can help you finance your pop-up venture, including:

SBA Loans

SBA loans are guaranteed by the U.S. Small Business Administration (SBA) and offer small businesses and entrepreneurs financial assistance. This organization provides loans for SMEs who can’t access significant amounts of capital. 

We’re proud partners of the SBA and would love to help you secure a loan for your first pop-up store.

Merchant Cash Advance

Here at L3 Funding, we make it quick and easy to apply for a business cash advance. We cut out lengthy processing times and complicated paperwork. Plus, we make it easy to apply for funding online. 

Unsecured Loans

Quick access to capital could change the outlook for your pop-up store. Contact us today to find out more.

Secure Working Capital for Your Pop-Up Store

As you can see, L3 Funding has a wealth of options to help your pop-up store business succeed. From small business working capital to micro loans, we have the financial solutions your business needs. 


How Much Does It Cost to Start a Laundromat? (Solved)

How Much Does it Cost to Open a Laundromat?

If you want to know how to open a laundromat, you’ll probably have questions like:

  • How much does it cost to start a laundromat from scratch?
  • What is the cost to start a laundromat?
  • How can I finance the start-up costs for a laundromat business?

Almost every household in America needs to wash their clothes regularly. However, not everyone can afford a washing machine and a dryer. Therefore, a laundromat can be a lucrative business. Additionally, laundromats can run autonomously and stay open 24 hours a day, potentially earning thousands of dollars each month.

But how much does a laundromat cost? As we address this, we’ll also offer some tips for your laundromat business plan:

How to Create a Laundromat Business Plan 

As you learn how to start a laundromat, you’ll need to create a laundromat business plan. 

As part of the planning process, you must consider the following:

How much will your laundromat cost?

When we consider how much it costs to open a laundromat, it could cost you anywhere between $100,000 and $200,000 to purchase an existing business, depending on the location.

If you want to purchase a laundromat in a large city, it will be more expensive than in a smaller location. Additionally, some states are significantly more costly than others. For instance, buying a laundromat in New York will be much more expensive than purchasing one in Alabama.

If you want to know how to open a laundromat for next to nothing, you can start one out of your home for little to no upfront cash. However, total start-up expenses for a small laundromat outside of your home will cost anywhere between $100,000 and $250,000.

What are your ongoing expenses?

When we look at how much a laundry business costs, we must consider ongoing expenses. You can expect to pay anywhere between $200 and $2,000 per commercial machine for water and heating (on an annual basis). Plus, you’ll have to set aside maintenance money—the average costs of repair to a commercial washing machine range from $50 to $150.

Who is your target market?

Ideally, you’ll want to cater to businesses with long-term service contracts. This includes hotels and companies with high laundry turnovers. However, the general public can also create a consistent stream of revenue for your laundromat business. Your ideal customers will live in apartments with no laundry services on-site. So, you may want to locate your laundromat near some apartment complexes without laundromats.

Understanding Budgeting Needs

When calculating how much to open a laundromat, it’s essential to understand your budgeting needs.

To do this successfully, you must work out:

  • Business Entity Fees

Check how much it will cost to create your business entity. The state you file your business in and the business structure you choose will determine how much you have to pay in fees. Typically, start-up paperwork costs between $200 and $1,000.

  • Build or Buy?

Determine whether you will build a new laundromat or purchase an existing business. If you decide to create your own laundromat, 2,000 square feet of space can cost anywhere between $200,000 and $500,000. Buying an existing business could work out to be cheaper, depending on the location and quality of equipment.

  • Machine Costs

If you’re starting from scratch, you’ll need to budget for washing and drying machines. Top-load machines cost between $500-$700 each, while front-loaders can cost anywhere between $3,500 and $20,000 per piece. Stacked dryers cost between $5,000 and $6,000. Therefore, an average-sized laundromat can cost between $150,000 and $400,000 to stock with commercial machines.

  • Municipal Fees

When people wonder, ‘how much is a laundromat business going to cost me?’ municipal fees are often overlooked. Cities charge laundromats fees to hook up sewage and water lines via wastewater fees, tap-on fees, and impact fees. These charges can range between $200 and $8,000 per machine. We recommend contacting your local water authority to find out which costs will apply to your laundromat business.

Finance Your Start-up Costs

Now you understand the basics of how to open a laundromat.  We provide several finance options to help you get started, including:

SBA Loans

We’re an official Small Business Association partner. As such, we simplify securing an SBA loan and can implement flexible and affordable payment options. 

Merchant Cash Advance

Here at L3 Funding, we make it quick and easy to apply for a business cash advance without lengthy processing times and stressful paperwork. 

Unsecured Loans

Having access to quick capital could change the outlook for your laundromat venture. With an unsecured loan, collateral is not required. Additionally, you could be approved in under 24 hours!

Secure Financial Funding Today

We can help make your dream of opening a laundromat a reality. Contact us today to find out which of our merchant funding solutions are right for you.


Gym Startup Costs Explained | L3 Funding

How Much Does it Cost to Open a Gym?

How much does it cost to start a gym? The answer depends on what kind of gym you want to open, where it will be located, and what amenities you plan to offer your guests. Also, on top of the cost to open a gym, you must consider the monthly cost of running a gym, as these recurring costs can be substantial.

Are you passionate about fitness? Now’s the time to make that passion pay the bills. Starting your own gym can be both ambitious and rewarding. However, the burning question is: how much does it cost to build a gym business?

In this post, we’ll discuss how much it costs to open a gym, as well as break down some one-time and recurring costs and provide some budgeting tips. Finally, we’ll list some financing options to help you get started on the road to your fitness empire.

Gym Startup Costs

When we consider the cost to start a gym, a tiny studio gym could be opened for as little as $65,000, whereas a mid-size gym would cost close to $115,000. If you’re wondering, ‘how much does it cost to open a fitness gym?’, a simple cycling studio can be set up for around $50,000.

You can practically spend anywhere between $50,000 and $1,000,000 setting up and opening a gym; it all comes down to the location, equipment costs, and facilities you require. 

Of course, there are other determining factors when considering how much is necessary to start a gym. For example, will you rent or own the premises? How much square footage will your gym require to be fully functional? Where would you like your gym to be located?

One-Time Costs

When answering the question, ‘how much does it cost to open a gym?’, the one-time costs can make a huge difference. Some critical costs to consider include:

  • Gym Equipment

Fitness equipment costs vary depending on the type of equipment you need and how many items you want to purchase. Estimate in the region of $10,000 for a personal studio and $50,000 if you’re going to fully equip a commercial gym.

  • Physical Location

Again, this cost will vary depending on how big your gym will be and where you want to locate the premises. Additionally, you’ll have to decide whether to purchase or rent the building.

  • Permits and Licenses

Individual states have different legal requirements regarding which permits and licenses your gym will need. So, we recommend you research any health and safety compliance permits and business license criteria in your state as part of your business plan.

  • POS System and Internet Facilities

These days, free internet access is necessary if you’re creating a business that serves the public. So, you’ll have to price out the best options for commercial WiFi around your gym premises. Additionally, you’ll need a POS system to take electronic payments, so be sure to get some quotes for these services.

Recurring Costs

The ongoing costs of owning and maintaining a gym vary significantly between gym sizes and types. However, these are some potential recurring costs for you to consider:

  • Insurance

Initial premiums of around $12,000 need to be paid annually and kept up to date. Make sure these figures are factored into your ongoing budget.

  • Lease or Mortgage Payments

Whether you decide to purchase or rent your location, you’ll have to pay monthly mortgage or lease payments. These costs will vary depending on the rental prices or loan amount specific to your premises.

  • Utilities

Gyms can use a lot of electricity, especially if you decide to open 24 hours a day. Large gyms can pay around $68,000 annually.

Financing Options

Now that we’ve answered the question ‘how much does it cost to open a gym?’, it’s time to discuss financing options.

SBA Loans

SBA loans offer financial assistance and are guaranteed by the U.S. Small Business Administration (SBA). This organization provides loans for SMEs (Small and medium-sized enterprises) who can’t access significant amounts of capital. We’re SBA partners and can help you secure a loan for your first gym.

Merchant Cash Advance

Here at L3 Funding, we make it quick and easy to apply for a business cash advance without lengthy processing times and complicated paperwork. Plus, you can easily apply for funding online. 

Unsecured Loans

Access to fast capital could change the outlook for your first fitness center. Contact us today to find out more.

Secure Working Capital for Your Gym 

As you can see, L3 Funding has a wealth of options to help your fitness business succeed. From small business working capital to micro loans, we have the financial solutions your business needs. Discover just how easy you can secure the monies you need with our merchant funding company


Difference Between Factoring & Accounts Receivable Financing

Receivables Financing vs Factoring: Which is Best for Your Company?

For any business to be a successful endeavor, it needs a consistent cash flow stream. Whether you’re looking for money to get through a dry period or hoping to expand your company, it’s critical to have access to funds.

Business owners who need financing have many options available, but many companies will end up weighing the pros and cons between receivables financing vs factoring.

When it comes to factoring vs discounting receivables, financiers draft these agreements in multiple ways. While both funding types use accounts receivable as collateral, the financing can be structured as an asset sale (factoring) or a loan (accounts receivable securitization). Many people use the terms accounts receivable securitization vs factoring interchangeably. However, they are very different. Account receivable financing is generally more akin to asset-based lending in its execution.

In this article, we will further explain the difference between factoring and accounts receivable financing, as well as their difference from traditional loans. Soon, you’ll be able to determine which type of funding is most suitable for your business.

Accounts Receivable Financing

Invoice factoring accounts receivable financing shares similar characteristics with a traditional bank loan, as they both use collateral to provide funds. However, you should be aware of a few significant differences before applying for financing. 

A traditional bank loan extends businesses a line of credit or provides funding by using the company’s assets, such as equipment or property. 

With accounts receivable financing, a lender provides funding when a business pledges its assets derived from its accounts receivables. These assets have extrinsic value — the sum of any outstanding balances that have been billed to clients yet have not been paid in full. However, since the business does not have access to funds from these outstanding invoices, they may need a loan as an advance. 

In the most common accounts receivable financing arrangements, the borrower receives financing capital related to a portion (typically up to 75 percent to 85 percent) of their accounts receivable.

In an accounts receivable loan agreement, the company is given an advance on its accounts receivable balances but does not sell its assets. Depending on the terms, your agreement can use unsecured or secured invoices as collateral. Either way, accounts receivable financing is treated as a standard loan in terms of repayment. 

While it may seem like an easy route to obtaining funding, most financiers will not accept an invoice over 90 days old or will not give funding if the business’s creditworthiness is questionable. 


Accounts receivable financing factoring has similar traits to standard accounts receivable financing. While both issue a line of credit or a lump sum for a business to meet its immediate funding needs, factoring accounts payable involves the purchase of the company’s outstanding accounts receivable by a financial company (called a factor).

A factoring arrangement will typically see the business receive an advance of 70 percent to 90 percent of a selected accounts receivable invoice. Once the lender collects the payment in full, the remainder of the invoice (minus the factoring fee) will then be released to the company. 

The factoring fee is a notable difference when comparing receivables financing vs factoring. This fee is based on the total face value of the debtors’ invoices and varies between 1.5 percent to 5.5 percent. The fee percentage is dependent on aspects surrounding the advance, such as how likely the original debtor is to pay.

Accounts receivable financing factoring arrangements do have benefits for the company, such as the ability to select which invoices it chooses to sell. After the company determines which invoices it will sell, the factor takes over the management and bookkeeping of the asset.

Receivable Financing vs Factoring

As you can see, there are many similarities between receivables financing and factoring. However, the core difference between receivables financing vs factoring lies in the final ownership of the invoices. 

Through receivables financing, your company still owns the invoices after you have repaid the loan. While this may seem advantageous since you retain rights, you will receive less upfront capital for the value of your asset. Financiers that are issuing out loans with invoices as collateral are also more likely to have stringent prerequisites. An invoice must meet a prescribed standard before being considered a valid form of collateral.  

A factor will also go through a business’s invoices but is typically more relaxed about the condition of the asset. However, if the company’s client (the debtee) isn’t held to reasonable terms of repayment or if they are inconsistent with their payment, the factor may mark that particular invoice as falling within an acceptable range to use as collateral. 

Receivables Financing vs Factoring: Which is Best for You?

Choosing between funding requires careful consideration, as each will have a different effect on your company. 

While receivable financing leaves business ownership in your hands, it is a loan and is counted as debt. If you need to seek further funding through traditional means, this may be an obstacle. 

In terms of factoring, even though you’re relinquishing your accounts receivable books to a factor, it becomes the factor’s responsibility to collect the debt. Therefore, the transaction doesn’t impact your debt-to-equity ratio. If you only need to secure a line of credit to hold your company over a rough patch, this may be the most fruitful avenue.

L3 Funding Can Help

While there are several aspects to reconcile when comparing receivables financing vs factoring, finding which is the right fit for your company can be difficult. If you would like to learn more about merchant funding or a secured business line of credit, contact L3 Funding. 


What Factors Determine Interest Rates? | L3 Funding

How Are Interest Rates Determined & Why Do We Need Them? 

Interest rates are an integral part of today’s economy. They’re a financial instrument used not just by banks to offset risk but also by governments to control a variety of economic trends and maintain stability. 

However, balancing the costs of borrowing money against the risks of lending money isn’t a straightforward process. The good news is that there are mechanisms for shaping interest rate changes and keeping them from negatively impacting the economy.

To help you better understand interest rates and how they work, let’s explore the underlying principles of how interest rates are determined, look at what factors determine interest rates, and explore why they’re so important. 

The Importance of Interest Rates

To better answer the question of how are interest rates determined, it’s crucial to first understand the important role that they play in the economy. In the broadest sense, interest rates matter because they play a crucial role in the way that money flows in the economy. An increase or decrease in interest rates can either stimulate borrowing or spending or limit it, both of which can be useful in certain situations.

But in what situations do interest rate variations matter? Below are a few big ones you should know.

It Affects the Stock Market

Any changes in the interest rates have a crucial impact on the stock and bond markets, as well as the economy. Investors will often react to an increase in interest rates with caution, which can cause the markets to react negatively. Meanwhile, a reduction in interest rates will usually result in the stock market going up.

That’s because lower interest rates mean more money being lent by banks to businesses, which means more investment and growth opportunities. On the other hand, an increase in interest rates can mean fewer loans and slower overall growth.

Increasing Interest Rates Can Slow Down Inflation

To understand what determines interest rates, it’s crucial to clearly understand why they would be raised in the first place. After all, if borrowing money remains cheap, businesses can pursue more opportunities, which means more potential for growth.

However, the flip side of that equation is that unsustained and irresponsible lending can lead to inflation, which increases the consumer price index, meaning that people can buy less for the same amount of money.

By raising the interest rates, central banks can slow down the influx of money into the economy and as a result, reduce the rise of costs for people that can’t keep up with the growth.

Decreasing Interest Rates Encourages Spending

On the opposite spectrum, decreasing interest rates encourages businesses and consumers to spend and invest more, which typically results in faster growth and an increase in the price of assets. 

Most central banks in the past few years have been much more willing to reduce interest rates or keep them low to encourage economic development and prevent stagnation. But low-interest rates, together with additional factors such as supply chain issues and the global pandemic, have resulted in inflation which may require raising interest rates in the near future.

Interest Rates Help Understand Other Economic Indicators

To better understand what factors determine interest rate changes, it’s a good idea to look at the broader picture of what the interest rates represent. This includes exploring common questions, like what are mortgage rates based on? When you combine the interest rate changes with other important economic indicators, you can get a more complete picture of what’s happening and what you might expect in the future. In fact, there are a few scenarios where the same interest rate changes could mean completely different things. 

For instance, if interest rates are increasing while the GDP is decreasing, that means the economy might be heading towards recession, which might prompt the central bank to take action and potentially reduce the interest rates. 

However, if the interest rates are decreasing and the GDP is growing, that is generally good news and shows that the economy is heading in the right direction. Still, this has to be measured against the consumer price index, which helps determine if inflation isn’t reducing people’s purchasing power. If that’s the case, the interest rates might need to be increased. 

Who Determines Interest Rates?

When figuring out what determines mortgage rates, it’s also important to look at who determines interest rates in general. The main thing to understand is that there isn’t one single force that can explain the changes. In fact, three major forces can be attributed with influencing interest rates, each playing a different role, with some having a more short-term interest rate impact and others impacting the long-term interest rates.

Let’s explore each of these driving forces below.

The Federal Reserve

To start answering the question of what affects mortgage rates, it’s a good idea to start with the Federal Reserve. The Fed uses two primary benchmarks to determine what the short-term interest rates should be. These two benchmarks, called SOFR and prime rate, control both what it costs to borrow overnight and what banks charge their customers. 

SOFR, which stands for Secured Overnight Financing Rate, is the rate that measures how much it would cost to borrow against the Treasury securities when using them as collateral. This used to be measured by LIBOR, but it was replaced by SOFR early in 2022 and is now updated every morning on the Federal Reserve’s website.

Meanwhile, the prime rate is the interest rate that banks typically charge their most trustworthy customers. It will always be above the base rate determined by the Federal Reserve but will still be lower than the average variable interest rate that banks offer.

But how can these benchmarks be used to understand what affects interest rates? These two benchmarks have ripple effects on the way banks lend and people or businesses borrow, which can be used to promote growth or stabilize the economy.

For instance, when the short-term interest rate increases, consumers and businesses have to recalculate whether their purchases or investments are feasible right now. At the same time, lenders have to evaluate whether a borrower can take on the loan with the increased interest rate. Over time, this tends to result in fewer loans being taken out. 

On the other hand, if the Fed decreases the interest rate, that makes loaning money more feasible for consumers and businesses. And that usually results in more loans being taken out.

As mentioned before, variable interest rate changes imposed by the Fed through SOFR can also impact stock prices. Lowering the interest rate stimulates the economy and stock prices while lowering it typically brings stock prices down.

The Treasury

The next driving force that you should know when figuring out how mortgage rates are determined is the Treasury and the investors willing to invest in Treasury Notes. It has an impact on all non-revolving credit, which includes not just mortgages but also other consumer loans used for education, cars, or other big expenses. These types of loans will typically be given out for at least a year, but can also be lent for three, five, or even ten years.

The way the rates are set is based on Treasury Notes, which are sold at auctions to the highest bidders. If there’s high demand for these notes, then the yields investors can earn will be lower. If the demand is low, then the yield may be higher. The yield from these Treasury Notes is what determines long-term interest rates.


Banks can also have a big influence on the interest rates by using different types of variable interest rates and payment schemes. And unfortunately, the irresponsible application of some of these can put consumers in tough positions. To understand what mortgage rates are based on and how different variable interest loans can impact them, let’s look at a few examples.

Some of the interest rate types were developed to meet the new demands of consumers. For instance, in the housing boom early this century, rapidly rising housing prices incentivized consumers to take out variable interest rate home loans that were low in the initial years and rose much higher in the later years. The logic behind these types of loans was that the rising real estate prices would offset the increase in the interest rate and allow homeowners to sell their property for a profit in advance. Unfortunately, as the real estate market started to cool off, that was no longer possible.

Then there are loans that are bad from the start. Some banks have had practices of offering interest or even negative amortization loans. These loans didn’t allow the borrower to pay off the actual loan and would leave them paying off the interest, which would make getting out of the loan very challenging.

How Are Interest Rates Determined for Mortgages? 

Many factors influence interest rates, especially when it comes to big-ticket items like mortgages. To help you gain a better understanding, let’s look at the main contributors and answer a few of the most relevant questions, such as how are mortgage interest rates determined for each person and does a down payment affect the interest rate?

  • Credit Scores. When lenders evaluate what the interest rate should be in a specific situation, they will almost always look at the borrower’s credit score. It’s the most important measure that shows lenders how reliable a borrower is and whether the risk of lending to them warrants a higher or lower interest rate.
  • Home Location. When figuring out what determines mortgage rates, it’s important to understand that location matters as well. Whether you are in a rural area or an urban area can have an impact on what interest rates the bank can offer you, although it’s a good idea to discuss with different lenders to see whether there’s a significant difference.
  • Loan Amount. Sometimes, the loan amount can play a role in the type of interest rate you can get. Although it varies depending on the lender, loans that are unusually large or small can result in higher interest rates. On the other hand, if you cover more of the home’s value with your down payment, that may help reduce interest as well.
  • Loan and Interest Type. There are many types of mortgage loans you could take out. As discussed earlier, the type of loan you take out based on your eligibility and needs will determine how high the interest rate is and how much of the loan you can pay back with each payment.
  • Down Payment. A common question about mortgages is does a down payment affect interest rate? The short answer is that it can. A larger down payment can help you get a lower interest rate because it helps reduce the risk for the lender. If you can make a downpayment of 15-20% or even more, that can have a significant impact on the interest rate the lender can offer.
  • Loan Term. Depending on what monthly payments you can afford, you should consider a shorter loan term if you want lower interest rates. While you will pay more each month, you can pay off the loan sooner, and the interest amount you end up paying will be lower.

Bottom Line

Understanding interest rates and how they work is crucial both for consumers and businesses. For the latter, it’s especially important because it enables companies to better predict how interest rates might change in the future and take advantage of better borrowing opportunities.At L3 Financing, we can help merchants access the best lending opportunities they can get. Our quick application process can allow you to receive quick merchant funding options that are best suited for your situation. Learn more about our services today!