The LIBOR rate, which stands for London Interbank Offered Rate, is the basis for many commercial loans, mortgages and other types of debt issues. Not all loans are influenced by this rate, but LIBOR rates information significantly affects the value of the US dollar in open market banking transactions. These transactions increase or decrease the ability to make dollar-valued loans. For instance, the Chicago Mercantile Exchange uses three-month LIBOR rates for Eurodollar contracts. Eurodollar contracts are US currency deposits made in banks anywhere outside the United States, not only in Europe.
If your business needs to make any deposits outside the US or handles any contracts that use LIBOR rates as a basis, it is prudent that you pay close attention to the rate changes. Even if the change is small, it can have a significant impact on the interest payments of loans and the availability of currency for future loans. Before you enter into or issue any loans that use the LIBOR, there are few items to consider:
1. Understand how LIBOR rates affect your business.
2. Monitor the historical LIBOR rates.
3. Contact or find a LIBOR rates provider.
Take LIBOR rates tutorialsBorrowing or lending with the LIBOR rate as the basis for the loan is only prudent if you understand exactly what the LIBOR rate is and how it operates on the global financial markets.
Track the historical and future information of the LIBOR ratesWhile you can't predict exactly what the LIBOR rate will do by looking at the past rate charts, it can help you understand what happens to the rate under a given set of macroeconomic conditions.
Find a LIBOR rates providerIf your business deals in a high volume of LIBOR rate loans, instant information on this rate is imperative. In addition, knowing the real-time LIBOR rate can assist in getting the best loan rate possible for your business if high volume is not a factor.
- Borrowing money from a source that uses LIBOR rates requires that your business pay a higher rate than the LIBOR, as this is how financial institutions make their money. However, the spread, or difference between your business or personal loan and LIBOR rates, establishes the quality of the loan. A large spread makes more money for the issuer and costs the borrower.