Cost of funds (COF) is a bank's weighted-average rate paid for its funding sources — deposits, wholesale borrowings, and FHLB advances — expressed as an annual percentage. It anchors the floor below which a bank cannot profitably lend.
COF represents what a bank pays to acquire the money it then lends out. The primary funding sources and their costs: demand/checking deposits (0–0.25%), savings and money market accounts (0.5–4%+), CDs (4–5.5%+ in 2024–2026), Federal Home Loan Bank (FHLB) advances, fed funds borrowings, and subordinated debt. Each source is weighted by its proportion in the bank's funding mix to produce the overall COF. The Federal Reserve's H.6 Money Stock release (https://www.federalreserve.gov/releases/h6/) and H.15 Selected Interest Rates (https://www.federalreserve.gov/releases/h15/) track benchmark deposit and funding costs across the system. FDIC call report data (https://www.fdic.gov/resources/resolutions/bank-failures/failed-bank-list/call-reports.html) shows individual bank COF as the ratio of total interest expense to average interest-bearing liabilities. For small business borrowers, COF is the invisible floor that sets minimum lending rates. When the Federal Reserve raises the federal funds rate, bank COF rises as deposit rates reprice upward — pushing lending rates higher within weeks. When the Fed cuts, COF falls more slowly because CDs and longer-term deposits are locked in. This asymmetry explains why business loan rates rise quickly but fall slowly after Fed pivots. Net Interest Margin (NIM) = Yield on Earning Assets minus COF. Banks target NIM of 2.5–4.5% to cover operating costs and generate profit. If COF rises faster than lending rates, NIM compresses and banks tighten credit standards — reducing small business loan supply.
Your loan rate must cover the bank's COF plus a spread for credit risk, operating costs, and profit. When COF rises — because deposit rates are rising — banks pass the increase to borrowers through higher loan rates. The prime rate (Federal Reserve H.15 release) tracks COF closely; SBA and conventional business loan rates are priced as prime plus a spread that remains relatively stable.
Banks' COF declines slowly after Fed cuts because CD and term-deposit pricing is locked in until maturity. A bank holding 18-month CDs at 5.2% still pays 5.2% COF even if the Fed has cut rates. As those CDs mature and reprice lower, COF falls and lending rates can follow. The lag is typically 6–18 months.
The Federal Reserve H.15 release (federalreserve.gov/releases/h15/) shows the fed funds rate, prime rate, Treasury yields, and certificate of deposit rates. FDIC call report aggregates show system-average interest expense ratios. The FHLB publishes its advance rates daily at the Federal Home Loan Bank websites.