Fed Raises Rates for the First Time Since 2023, and Funders' Credit Lines Reset First
The Federal Reserve raised its benchmark rate on September 16 for the first time since July 2023, lifting the federal funds target range a quarter point to 3.75% to 4% on a 12-0 vote. 1 2 The new rates took effect September 17, 3 and PNC moved its prime rate to 7.00% that day, while Reuters reported that JPMorgan, Bank of America, Citigroup, Wells Fargo, KeyCorp, Huntington, Fifth Third and Truist were raising prime to 7% from 6.75%. 4 5 Our reading for alternative lenders: funding cost moves before yield does, and one public lender's disclosures show how directly.
The funding side: Enova International, a public lender carrying $4.26 billion of small business loans and finance receivables at fair value, prices its corporate credit agreement at "the SOFR rate plus 3.25%," so benchmark moves reach its debt cost directly. 7
The context: Fitch Ratings put its U.S. private credit default rate at 6.3% for the 12 months through August, a record for that index, which tracks sponsor-backed companies far larger than a typical merchant; Proskauer read 2.51% for the second quarter and Houlihan Lokey 0.8% of principal market-wide. 8 9 10 11
What Alternative Business Lenders Need to Know
Why does a quarter point squeeze a funder's margin before its yield?
Because the two sides of a funder's book reprice on different clocks, and the funding side goes first. Enova reported that the weighted average interest rate on its debt fell to 8.10% in the second quarter from 8.76% a year earlier, "resulting primarily from year-over-year decreases in benchmark rates." 7 In August it amended a separate receivables facility to SOFR plus 5.00%, from SOFR plus 5.50%. 12 Benchmark cuts reached that debt cost directly on the way down; the same path runs the other way now. The arithmetic for a smaller funder is plain (our calculation, not a disclosed figure): $50 million drawn on a line priced over a benchmark costs about $125,000 more a year for every 25 basis points, before any change in spread. The Fed's 4.1 percent year-end median is consistent with one more quarter-point increase, 6 and on that path the same $50 million would cost about $250,000 more a year than it did before September 16. The reset date follows the facility's terms, not the funder's renewal calendar. The asset side waits. A merchant advance funded in August still carries the factor rate agreed in August, and a fixed-rate equipment lease keeps the payment set at funding. Repricing happens at renewal, which means the back book absorbs the increase until it turns over, and a book that turns over slowly carries the higher cost longer. That is our reading of how fixed-price products meet floating funding; Enova's filing is the only disclosed evidence here, and one public issuer does not show what private funders pay.
Where does prime at 7% show up in a merchant's file?
In the bank debt the merchant already carries. SBA 7(a) maximum rates "are pegged to the prime rate or an optional peg rate," with variable-rate caps running from base rate plus 3.0% on loans above $350,000 to base rate plus 6.5% on loans of $50,000 or less. 13 With prime at 7.00%, 4 those caps work out to 10.00% and 13.50% (our arithmetic). The Fed's May Financial Stability Report said small business loan rates "remain near the top of the range observed since 2008," and that short-term delinquency rates on those loans remained above prepandemic levels. 14 A merchant with a prime-indexed bank line or a variable SBA loan pays more once the new rate applies, and that shows up on the bank statement as a larger recurring debit. The increment from one quarter point is small (our arithmetic: about $375 a year on a fully drawn $150,000 prime-based bank line), so the underwriting item is the full payment at the new rate, not the change: pull prime-indexed obligations off the bank statements and put the current payment into the debt-service view before the merchant mentions it. Whether the extra payment pushes more of those merchants toward advance renewals or stacking is a reasonable expectation, not a measured one; no data yet shows the shift.
What should lenders do before the October meeting?
Start with the funding side. Rerun that arithmetic for each SOFR- or prime-indexed facility with its own drawn balance and spread, then ask each warehouse or credit-line provider for the exact reset date and whether any covenant is tied to interest coverage; where one is, run that test at the new rate before the next reporting date. On the asset side, price renewals and new factor rates at today's funding cost rather than last quarter's. In underwriting, apply the debt-service step to renewal files as well as new applications, because a merchant renewing an August advance may now carry a bank payment the August file did not show. The next date to watch is the Fed's October 27-28 meeting, 15 where the Associated Press reported most economists expect a hold while futures pricing points to a December hike. 16
Did lenders have warning?
Yes, for anyone reading the July statement. The September statement was brief about its reasons: "Today's policy action will support a timelier return to the Committee's 2 percent goal. The Committee will deliver price stability." 1 Every rate change in 2024 and 2025 was a cut, ending at 3.50% to 3.75% on December 11, 2025, so this reverses the direction funders have priced against for two years. 2 At the July 29 meeting, Beth M. Hammack, Neel Kashkari and Lorie K. Logan dissented because they preferred a quarter-point increase then. 17 The AP reported that 16 of the 18 policymakers who submitted projections penciled in at least one more hike this year, and quoted Chair Kevin Warsh: "The plain fact is that inflation is too high and has been for too long." The two-year Treasury yield rose to 4.74% from 4.67% that evening. 16
What does Fitch's 6.3% actually measure?
A narrower market than the headline suggests. As Benzinga reported the release, Fitch's index blends "more than 1,300 credit opinions used in pooled-asset ratings such as middle-market CLOs" with "more than 350 private ratings often used by insurers for capital purposes." 8 Its definition of default is broad: over the trailing year, interest deferrals and PIK substitutions made up 47% of events, stressed maturity extensions 41%, uncured payment failures only 8%, and bankruptcies, liquidations and control transfers the remaining 4%. 8 Different borrower universes and default definitions help explain why the three indexes in the summary above disagree on the level. The Fed's May report said private credit defaults "remained at relatively low levels," while noting weaker debt-servicing capacity at riskier private firms "that rely on floating-rate debt such as leveraged loans and private credit." 14 For a merchant funder, this is context rather than a read on its own book. When a credit memo or an investor letter cites "record" private credit defaults, name the index and its scope.
What the record does not yet show: how private MCA, factoring and revenue-based funders' facilities are priced, since almost none publish terms; where SOFR settles after the hike; and whether merchant delinquencies move with prime. The sources carry the facts; the arithmetic and the operator reading, where labeled as ours, are ours.
Our Opinion
A quarter point is small. The timing is what matters. The Fed moved after two years of cuts, and funders who priced 2026 renewals on the assumption that the next move was down are now holding that assumption on their books. The three July dissents were the notice.
Our view: this is a pricing test before it is a credit event. Prime-based bank credit just became more expensive for the same merchants alternative lenders serve, so demand may rise in the same weeks that funding costs do. A funder that books that demand as growth before seeing how those merchants carry the higher bank payment is repeating the bet the cut cycle rewarded, and a rising-rate cycle is when that bet gets tested. One way to see it early: tag the approvals from this week forward whose statements show a prime-indexed bank payment, and compare their first 60 days of remittances with the rest of the book before raising volume targets.
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Headlines You Don’t Want to Miss
Truist agreed to sell $5.5 billion of auto loans representing substantially all assets of Regional Acceptance Corporation, generating $5.2 billion of net proceeds, a $535 million reserve recapture and $945 million, or 22 basis points, of CET1 capital, with closing expected in late third quarter or early fourth quarter. 18 Truist did not name the buyer; Bloomberg reported it is Apollo Global Management. 19 20 21 Truist's non-performing indirect auto loans reached $569 million at June 30 from $267 million at year-end, a figure that covers its whole $23.8 billion indirect auto book and partly reflects a January 1 change that counts loans with 12 or more months of payment extensions as non-accruing. 22 Chief Financial Officer Mike Maguire told American Banker that Regional Acceptance is "typically a loan-only, loan-first national business" where the chance to build a broader client relationship "is extremely limited." 19 Price, servicing and the fate of the dealer platform were not disclosed. Our read: when a bank exits a credit box and private capital buys the book, the risk stays in the market under a different funding source.
Banks and credit unions originated 85% of subordinate-lien loans in 2022 but 66% in 2025, while nonbanks rose from 8% to 29%, according to Curinos, which puts depository HELOCs at about 40 days from application to booking against about 15 days at nonbanks. 23 Curinos also puts raw 30-day-plus delinquencies at 2.4% for nonbank HELOCs against 1.4% at depositories, a gap it attributes to higher line utilization and credit-box mix rather than weaker credit. 23 ICE counted $11.7 trillion of tappable equity in the second quarter. 24 HousingWire's summary of the trend draws on a white paper, "Reversing the Tide: Scaling Bank HELOC Lending," written by executives at Incenter Lender Services, Figure, Curinos, Upstart and Fifth Third Bank, among them Figure's vice president of lending partnerships. 25 American Banker reports that banks are re-entering the second-lien securitization market as rates rise, and KBRA analysts say bank-sponsored transactions "have also reemerged." 26 Our read for business lenders: speed took share from banks in a product they dominated as recently as 2022, and banks are now working to close that 25-day gap.
Urban Standard Capital launched an open-ended luxury residential lending fund on September 15 with anchor capital from New Holland Capital, targeting $1 billion of originations in its first year against $587 million of luxury originations in 2025; the anchor commitment, leverage and redemption terms were not disclosed. 27 The firm says 80 of its 127 single-family luxury loans have paid off with no losses and that its median loan-to-value has been 53%. 27 Its lending also runs on bank back-leverage: Commercial Observer reported in August that Western Alliance Bank raised Urban Standard's financing capacity to $200 million across three funds, which founder Seth Weissman said he would turn over into "probably $800 million of lending power." 28 Morningstar PitchBook counted $607 billion in U.S. evergreen funds at March 31. 29 Whether that back-leverage floats is undisclosed. Our read: it is the first thing a rate hike tests.
Sources
1 Federal Reserve | Federal Reserve issues FOMC statement, September 16, 2026
2 Federal Reserve | Open Market Operations: FOMC target federal funds rate history
3 Federal Reserve | Implementation Note issued September 16, 2026
4 PNC Bank, N.A. | PNC Bank, N.A. Changes Prime Rate
5 Reuters via Yahoo Finance | Major US banks raise prime rate after first Fed rate hike since 2023
6 Federal Reserve | Summary of Economic Projections, September 16, 2026
7 Enova International | Form 10-Q for the quarter ended June 30, 2026
8 Benzinga | Private Credit Defaults Climb To 6.3% In August, Fitch Says
9 Private Equity Wire | US private credit defaults climb to record 6.3%
10 Proskauer | Private Credit Default Index Reveals Rate of 2.51% for Q2 2026
11 Houlihan Lokey via Business Wire | Stress Among the Smallest Private Credit Borrowers Has Climbed More Than Tenfold
12 Enova International | Form 8-K, August 14, 2026 (NC LOC 2024 Facility Third Amendment)
13 U.S. Small Business Administration | 7(a) loan program terms, conditions, and eligibility
14 Federal Reserve | Financial Stability Report, May 2026
15 Federal Reserve | Meeting calendars and information
16 Associated Press via WPLG Local 10 | Federal Reserve hikes key rate for 1st time in 3 years
17 Federal Reserve | Federal Reserve issues FOMC statement, July 29, 2026
18 Truist Financial | Form 8-K Exhibit 99.1: Strategic exit of near-prime auto lending
19 American Banker | Under new CEO, Truist is exiting near-prime auto lending
20 Bloomberg | Apollo Buys $5.5 Billion of Truist's Near-Prime Car Loans
21 Finimize | Truist Sells $5.5 Billion In Auto Loans As Rate Bets Rise (relaying Bloomberg)
22 Truist Financial | Form 10-Q for the quarter ended June 30, 2026
23 Curinos | Home equity market webinar recap, five takeaways (August 19, 2026)
24 ICE | August 2026 Mortgage Monitor
25 HousingWire | Nonbank HELOC lenders gain market share as tappable equity hits $11 trillion
26 American Banker | IMBs need to watch second-lien deal costs as banks enter
27 Urban Standard Capital | Urban Standard Launches Luxury Real Estate Lending Fund
28 Commercial Observer | Urban Standard Capital Grows $200M Credit Facility With Western Alliance Bank
29 WealthManagement.com | Morningstar PitchBook: Evergreen Funds Grow to $607B Despite Redemptions
