A key indicator of a country’s economic health is its interest rates. Every time interest rates rise or fall, they impact consumer actions, which can have a ripple effect on small businesses in the market. An uncertain economic future could make consumers less willing to spend and banks less willing to lend — actions that can squeeze small businesses at both ends.
Lowering interest rates is a federal strategy that tends to, at first, stimulate economic growth. With lower interest rates, consumers have more cash on hand to spend and in turn generate more spending throughout the economy. Small businesses can make smaller payments on their debt, which gives them more operating cash.
Why are rates being lowered
In July 2019, the Federal Reserve lowered U.S. interest rates for the first time since 2008 in an attempt to keep the economy on pace and prevent it from downturning. Rates will now float between 2% and 2.25%, impacting credit card and mortgage borrowers. The current Federal Reserve strategy is to get ahead of economic downturns by making interest rate adjustments ahead of potential downturns, which means that this current lower interest rate isn’t necessarily a response to an unhealthy economy, and was instead made preemptively.
How lowering rates will affect your loans
Lower interest rates means that small business owners can look forward to more favorable rates on small business loans in addition to personal credit that might help fund business operations. Here’s how the federal rate can impact different types of borrowing that are pertinent to a small business owner:
Small business loans: Most small business loans aren't tied to the federal rate but can still be impacted by it because the federal interest rate provides a measuring stick that banks use when setting interest rates on their other products, such as small business loans. Typically, U.S. banks set their prime rate at about 3% higher than the Federal Reserve’s rate.
Personal loans: Most personal loans are fixed-rate, so fluctuations in interest rates don’t have an impact on your monthly payments. However, if you’ve taken out personal loans for any reason, the current lower interest rates might present a good opportunity to consolidate your debt into one new loan at a lower interest rate. This could be especially powerful if your credit has improved since you first borrowed the money.
Credit cards: Credit card companies tend to charge variable rates, which means that the interest you pay on outstanding credit card debt could dip with the rate change. If you carry outstanding debt for small business related expenses on your credit card, this will slightly lower your debt for the time being. Plus, it may be cost effective to look into transferring your debt from existing credit cards to a new card, taking advantage of these lower rates.
If you’re making minimum payments, this could also mean that your payments are smaller and you have more cash available for daily expenses. If you’re trying to pay the entire balance of your credit card, now could be the cheapest time.
Auto loans: If your business has borrowed money to own vehicles and you’re on a variable rate loan, you could notice a dip in your interest levels and subsequently on your monthly payments, but probably not by a lot. If you’ve been meaning to get an auto loan for your small business, now might be a prudent time to do it as the lower interest rates could mean that auto manufacturers have lower financing costs for their operations, giving them some negotiating room on the actual cost of the automobile.
Mortgage: If you have mortgages on properties that your business owns and you received these mortgages when there was a higher interest rate, now might be a good time to refinance them. If you can refinance at the current lower rate, this could translate to significant savings in interest over the course of your mortgage term. It could also result in slightly lower payments, which would mean more operating cash each month. Lower interest rates do not impact the principal balance of your loan, however, and with a fixed, 30-year mortgage, you’re unlikely to notice a difference in your monthly payments.
What this means to you
Lower interest rates can make it easier for you to take on more credit, but this also depends on your credit score at the moment — both your personal credit score and your credit track record for your small business. Lower interest rates don’t necessarily equate to easy credit; however, if you’re in a good credit situation, then this can be a great time to take advantage of the lower rates and borrow money to grow your business.
Just make sure that you don’t overextend yourself and take on too much debt. Even with lower interest rates, it can be easy to slip into a compromised financial situation. Having enough cash on hand to fund the growth of your business is often what separates businesses that grow and those that die out. You don’t want all your cash to be tied up in debt servicing.
Also, remember that lower interest rates do indicate a level of uncertainty in the economy or even an economic slowdown. If you take on more debt in anticipation of more spending but the economy slows instead, you could find yourself in a situation where you’re having a hard time generating enough business to cover the minimum payments on your debt. When it comes to lower interest rates, make shrewd business moves and proceed with caution.