Fed Cuts Rates For Third Time in 2025: Prime Drops to 6.75%
Fed Cuts Rates For Third Time in 2025: Prime Drops to 6.75%
The Federal Reserve announced a 25 basis point cut to the federal funds rate on December 11, 2025. This brings the benchmark prime rate down to 6.75%—a level not seen since September 2022, when it last hovered at 6.25% or lower before the aggressive hiking cycle kicked in. For businesses and consumers alike, this latest easing amid cooling inflation is welcome although a half-point cut would have been our preference (we are biased for lower rates for our borrowers).
It's the third rate cut in the past year, capping off a total reduction of 125 basis points (1.25%). Here's a quick recap of the Fed's dovish pivot:
September 18, 2025: 50 basis point cut
October 30, 2025: Another 50 basis point cut
December 11, 2025: 25 basis point cut
These moves have shaved costs off borrowing, especially for variable-rate loans tied to the prime rate. If your business loan or line of credit is benchmarked against prime, you're likely feeling the pinch loosen up a little.
Real Savings and More Financing on the Table
A one percent drop in rate for 10 year term loans equals to about a 4.5% payment savings. For a typical $500,000 business loan that saves the business owner about $5,000 year in interest payments than what they were paying last year. With a 1.25% rate cut in 2025 a $2 million loan will pay over $16,000 less than they did last year.
For small business owners eyeing SBA loans (like 7(a) or 504 programs), lower rates don't just save money—they expand your borrowing capacity. The SBA mandates a minimum Debt Service Coverage Ratio (DSCR) of 1.25, meaning your net operating income (NOI) must cover loan payments by at least 125%. In formula terms: DSCR = NOI / Annual Debt Service ≥ 1.25.
With rates 1.25% lower, the same NOI can now support a larger loan principal without breaching that threshold. Using a $500,000 loan example a borrower would be able to qualify for a loan 6-6.5% larger loan than in 2024. With the Fed’s 1.25% in cuts, the same cash flow that qualified you for $500k a year ago now qualifies you for about $530k–$535k today — an extra $30k–$35k you can put to work in the business.
Think Inside the LoanBox.
The Fed's rate trajectory remains data-dependent, but with inflation trends stabilizing, more cuts should be on the horizon in 2026. If you're sitting on higher-rate debt, now's the time to consider refinancing or negotiating adjustments. At LoanBox, we're here to model your specific scenario—whether it's an SBA application, commercial real estate loan, or working capital line.
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