Three economists go hunting and come across a large deer. The first economist fires and misses three feet to the right. The second fires and misses three feet to the left. The third doesn't fire, but shouts out with great excitement, "we got him, we got him!"

You need to borrow and your lender gives you a choice between a fixed rate and a variable rate loan. Which do you choose? Or, you have excess funds that you don't need for a while. Do you buy a fixed rate government note, or put the money in your business' money market fund? This should simplify things for you and give you what you need - without firing two shots and thinking that, on average, you hit the mark.

When you finish reading this in ten minutes, or so, you're not going to be an interest rate guru. Leave that to the economists, the bankers and the other self-proclaimed experts who try to make a living predicting what interest rates will do next. But, you will have enough of an understanding to directionally forecast where interest rates are likely to be headed, why, how your small business might be affected, and what you should be doing to protect your company.

A lot of the confusion and mystery about interest rates stems from inaccurate and sometimes misleading statements in the press - because too many financial writers don't know much more about interest rates than you do. They tell us that "rates" are moving higher - well, which rates? They tell us that the President, or congress, or the Federal Reserve Chairman is "responsible" for rates going up. They say that the Federal Reserve is trying to push "mortgage rates" higher. They imply that banks are "gouging" customers with high loan rates and are "miserly" with the rates they pay on deposits. So, let's try to get enough things straight to take the mystery out of this.

Stop thinking about what "rates" are, where "rates" are heading, and how "rates" are going to affect your business. There are not "rates" - there are short term rates (i.e. less than one year) and long term rates (you guessed it - more than one year) and it's important to differentiate between the two. Think about the interest rates on government securities; you can buy them with maturities that range anywhere from a few days to almost thirty years. The important things to understand are that, while short term and long term rates move in the same general direction over long periods of time, they don't change at the same speed, they often don't change by the same amount, and, sometimes, they can actually move in opposite directions.

The level of short term rates is primarily a function of what the Federal Reserve - the country's central bank - wants them to be. The Fed controls short term rates by reviewing and setting the Fed Funds rate every few weeks. The Fed Funds rate is the rate at which U.S. banks lend to each other, when some banks have excess funds and others need to borrow them to balance their books at the end of each day. (These "loans" between large banks usually expire the next day and have to be renegotiated.) So, the Fed Funds rate is what the Fed says it is; they set the rate where they want it to be and change it by whatever amount they want.

Then the level of the Fed Funds rate influences all other short term rates, from Treasury Bills, to Money Market Funds, to short term bank deposits, to everything else. All other short term rates are set by the markets, but if they start to move very far away from where they should be, arbitragers come into the picture to drive them back into line. The bottom line - and the one thing to watch - is the Fed Funds Rate; nothing else matters, as far as short term interest rates are concerned.

Long term rates, on the other hand, are not directly influenced by the Federal Reserve and are much more dependent on supply and demand factors and the overall direction of the financial markets. Supply and demand can, and often does, extend across financial markets. For example, if investment in the stock market is weak, those funds need to go somewhere and may end up in the bond market; this means that demand for bonds increases and this can push long term rates higher. Or, financial traders may believe that inflation will increase down the road and push long term interest rates higher as a result. Or, speculators may come into the market and, at least for short periods of time, push long term rates significantly in one direction, or another. The point to remember is that collective factors in the financial markets are responsible for movements in long term rates and, while the Federal Reserve can influence long term rates by moving short term rates up, or down, it doesn't set them directly and it is sometime frustrated because the markets "over-ride" their intentions.

That's enough Economics 101. Here are some interest rate rules of thumb that can help your small business. Our economy tends to continuously repeat cycles of growing for several years and then slipping into recession for a year or two. In the early stages of an economic recovery, both short term and long term interest rates stay low; as growth continues, however, short term rates start to rise. Then in the middle of the recovery, there is often some modest movement in longer term rates. Toward the end of an economic growth cycle, the economy really heats up and both short term and long term rates rise further. In this "end game," however, short term rates are likely to move up much more quickly and, at times, actually be higher than long term rates. Finally, as the economy collapses, all interest rates start to fall, but short term rates normally fall faster and further than long term rates.

This is, of course, a generalization, but what does it mean and how do you take advantage of it? Just follow the likely interest rate trend. If you are borrowing at the beginning of an economic recovery, get a long term rate - at the end of the recovery, a short term rate might be better. If you're saving, it's just the opposite - use a short term rate at the beginning of a recovery and a long term rate toward the end.