Interest-rate planning

The Fed Raised Rates: Stress-Test Your Floating-Rate Business Debt for 2027

The Federal Reserve raised its target rate by 25 basis points on September 16, 2026. If your business carries a floating-rate revolver, asset-based facility, or variable-rate term loan, the useful response is not to predict the next meeting. It is to calculate what each reset does to cash flow and debt-service coverage before the 2027 budget is locked.

A quarter-point move sounds small because it is expressed as a fraction. Applied to a seven-figure balance, it becomes an operating expense. Applied to a business already close to a covenant threshold, it can consume part of the cushion that management thought it had.

This is where rate news becomes balance-sheet work. The June 2026 decision was a hold; our earlier guide explained how the federal funds rate reaches business borrowing. September changed the premise. The question now is how much of your debt floats, when it resets, and whether the resulting expense still fits the cash cycle.

What did the Federal Reserve change on September 16, 2026?

The Federal Open Market Committee voted 12 to 0 to raise the federal funds target range by one-quarter percentage point, moving it from a range of 3.50% to 3.75% to a new range of 3.75% to 4.00%. The committee described economic activity as expanding at a solid pace and inflation as remaining elevated. The change took effect on September 17, 2026, according to the Federal Reserve’s statement and implementation note.

The accompanying projections matter as a planning range, not as a promise. The median participant projection for the federal funds rate was 4.1% at the end of both 2026 and 2027, up from the June medians of 3.8% and 3.6%, respectively. Those figures represent individual participants’ assessments of appropriate policy, not a commitment by the committee. The September Summary of Economic Projections is therefore a reason to test multiple cases, not to build a budget around one forecast.

Which business debts actually move when rates rise?

Floating-rate business debt is financing whose interest rate resets against a benchmark, usually plus a contractual spread. Prime-based revolvers, many asset-based lending facilities, some equipment and term loans, and SOFR-based facilities can all reprice while the balance remains outstanding.

The Fed does not set your loan rate, the prime rate, or SOFR directly. It sets a target for overnight federal funds. Banks establish prime, while the Federal Reserve Bank of New York calculates SOFR from overnight Treasury repurchase transactions. As of September 16, the Federal Reserve’s H.15 release still reported bank prime at 6.75%, before the new policy range took effect. Borrowers should check the next published observation and, more importantly, the actual benchmark and reset language in their agreements rather than assuming every facility moves on the same day. See the Federal Reserve H.15 release and the New York Fed’s SOFR explanation.

How much does a 25-basis-point increase cost?

One basis point is one-hundredth of a percentage point, so 25 basis points equals 0.25%. For a simple annual sensitivity calculation, multiply the average outstanding floating-rate balance by 0.0025. The result is the approximate additional annual interest expense if the full increase passes through for a full year.

Illustrative arithmetic only. Actual interest depends on daily balances, day-count conventions, reset timing, benchmark movements, fees, floors, and the terms of the financing agreement.

The table is intentionally simple. Its purpose is to establish scale before the finance team builds the detailed schedule. A revolver drawn only during seasonal peaks will not carry the same annual cost as a fully drawn term facility, even when their stated rates are identical.

How does a rate increase affect DSCR?

A debt-service coverage ratio compares the cash flow available for debt service with the required principal and interest payments. The exact definition varies by agreement, so use the lender’s definition from your covenant package. The direction is consistent: if cash flow stays unchanged and required interest rises, DSCR falls.

Consider an illustrative business with $450,000 of cash flow available for debt service, $300,000 of current annual debt service, and a $2 million average floating balance. Its starting DSCR is 1.50x. Holding every other assumption constant, the rate cases change the denominator as follows:

Illustrative calculation, not a lending threshold or Capital Source underwriting standard. The example assumes the rate change applies for a full year to a constant $2 million balance and that cash flow available for debt service remains $450,000.

A move from 1.50x to 1.48x may not look dramatic in isolation. It becomes more consequential when it arrives alongside slower collections, margin compression, a customer loss, or new amortization. Owners should therefore run the rate case inside the full operating forecast rather than treating it as a separate treasury exercise. For the underlying calculation, see our guide to calculating and improving DSCR.

How should you stress-test floating-rate business debt for 2027?

A useful stress test turns each financing agreement into a small set of controllable inputs. It should show management which facilities reprice, how quickly the expense reaches the income statement and cash forecast, and how much covenant cushion remains under each case.

1. Build a debt schedule by facility. List the average expected balance, benchmark, spread, floor, reset frequency, maturity, amortization, and financial covenants.
2. Run at least four rate cases. Model the current contractual rate and increases of 25, 50, and 100 basis points. A downside case is a planning tool, not a prediction.
3. Recalculate monthly interest. Use projected balances by month so seasonal borrowing appears where it actually occurs.
4. Recalculate DSCR and fixed-charge coverage. Apply the definitions in each agreement rather than a generic internet formula.
5. Layer in one operating shock. Combine the higher-rate case with slower receivable collections, a margin decline, or a delayed customer payment. Risk rarely arrives one variable at a time.
6. Set a management trigger. Decide in advance when the company will reduce draws, accelerate collections, defer discretionary spending, or begin a refinancing conversation.

The discipline is the same one behind a cash-flow view of earnings: the income statement can remain profitable while timing and debt service consume liquidity. Rate sensitivity belongs in the cash forecast, not only in a note below the debt schedule.

Does a rate increase mean you should refinance?

A rate increase does not automatically make refinancing the right move. The better question is whether the existing facility still matches the asset, cash cycle, repayment horizon, and reporting burden it was meant to finance.

Refinancing can create value through structure even when the replacement rate is not materially lower. Extending maturity, smoothing amortization, replacing a balloon, consolidating mismatched short-term obligations, or aligning availability with receivables can improve liquidity in ways that a headline rate comparison does not capture. Fees, prepayment provisions, collateral requirements, covenants, and total dollars paid still belong in the comparison.

Capital Source evaluates the whole structure through its affiliates, syndicates, network of banks, lending partners, and private credit groups. Depending on the business and collateral, that may include a line of credit, receivables financing, asset-based lending, equipment financing, or a term structure. Availability, approval, amount, structure, and terms remain subject to review and lender approval.

Key takeaways

• The Fed raised its target range by 25 basis points. The new range is 3.75% to 4.00%, effective September 17, 2026.
• The Fed does not directly set your loan rate. Your agreement’s benchmark, spread, floor, and reset language determine how and when the change reaches you.
• Twenty-five basis points equals $2,500 per year for each $1 million of average floating debt. Actual expense varies with balances, timing, conventions, and contract terms.
• Higher interest reduces coverage when cash flow is unchanged. Recalculate DSCR using the definition in the financing agreement.
• Budget a range, not a rate forecast. Run current, +25, +50, and +100 basis-point cases and combine them with one operating shock.
• Evaluate structure, not only price. Maturity, amortization, collateral, availability, fees, and covenants can matter as much as the stated rate.

Frequently asked questions

Sources

• Board of Governors of the Federal Reserve System, Federal Reserve issues FOMC statement, September 16, 2026.
• Board of Governors of the Federal Reserve System, Implementation Note issued September 16, 2026.
• Board of Governors of the Federal Reserve System, Summary of Economic Projections, September 2026.
• Board of Governors of the Federal Reserve System, Selected Interest Rates, H.15.
• Federal Reserve Bank of New York, Secured Overnight Financing Rate data and methodology.

This article is for informational and educational purposes only and does not constitute financial, investment, accounting, tax, or legal advice. Rate observations are date-stamped and may change after publication. Illustrations do not represent Capital Source underwriting criteria or an offer of financing. Capital Source provides access to commercial financing solutions through its affiliates, syndicates, network of banks, lending partners, and private credit groups. Availability, approval, funding amount, structure, and terms are subject to business review, underwriting, and lender approval.