How Will Dropping Interest Rates Impact My Business

How will dropping interest rates impact my business?

The Fed just cut interest rates for the second time this year. Here’s how their decision could impact borrowing costs, real estate and your business’s financial future.

Key takeaways:

• On November 7, the Federal Reserve (the Fed) announced they were reducing interest rates by 0.25%, the second in a series of cuts this fall.
• The Fed’s decision impacts the interest rate on a range of financial products, so you may see rates change on loans, credit cards and bank accounts.
• The rate change may also impact the economy, which could affect your portfolio, competition and supply chain.

The Federal Reserve cut the federal funds rate by 0.25% during its last meeting — the second consecutive rate cut after a decrease of 0.5% in September. Lowering the rate offers relief for businesses across the country, since it has a domino effect on the benchmarks used to establish business and consumer debt interest rates.

It will take several months before the full impact is felt across the economy. In the meantime, you may be wondering how the drop in interest rates might affect your business. Here’s an overview of changes you may experience and some factors to consider.

Borrowing costs

While a rate cut doesn’t change the economy overnight, it can have a near-immediate impact on borrowing costs.

Depending on the type of debt your business carries, these changes can vary in timing and impact. For example, the interest applied to credit card rates typically drops within one or two billing cycles, and the interest on adjustable-rate loans and lines of credit — including adjustable-rate mortgages — will generally change within a billing cycle.

Additionally, since a rate cut makes borrowing cheaper, loans become more attractive. This means that if your business wants to make a large purchase, such as equipment or a new warehouse, it may be more beneficial for you to do so when the cost of borrowing is lower.

Keep in mind that any fixed-rate loans will not be adjusted. To take advantage of lower rates, it may make sense to consider refinancing those loans depending on your current financial situation and the cost to refinance.

Is now the right time to apply for financing?

Unfortunately, no one has a crystal ball to know what the Fed will do next, and the optimal time to apply for financing depends on your financial outlook and goals.

Today’s rate cut may allow you to secure financing at a lower rate than in months past — but if you anticipate more cuts on the horizon, and you don’t need financing right away, it may be tempting to “time the market” and secure financing when you think interest rates have hit their low point.

However, waiting also comes with risk: if the Fed decides to increase rates in the future, you may miss out on the rate you could have secured today. Consider talking through your options with a financial professional to discuss the best next step for your business.

Economic activity

As borrowing costs fall, consumers typically loosen their grip on their wallets. Lower debt payments can lead to increased disposable income, which directly fuels economic activity and may help boost your bottom line.

Cash savings rates

Interest rate slashes benefit borrowers, but there’s a trade-off: The return on cash savings goes down. If you hold cash in a business checking or savings account, be prepared to earn less interest. Now might be a good time to reconsider how much money you have in your accounts and whether to invest it in your business or the stock market or to pay down debt.

Financial markets

Lower borrowing costs generally translate into bigger profits for businesses of all sizes. This can make public companies more attractive to investors. And while every interest rate cut involves a different set of circumstances, the stock market usually responds favorably to cuts. It makes sense to contact an investment advisor to understand the low-interest-rate investing environment so you can reposition your portfolio if needed.

Employment

As economic activity picks up, businesses often hire employees to capitalize on the uptick. This may make it harder to find suitable candidates for vacant roles. It also might make hiring more expensive as prevailing pay rates adjust to a tighter labor market. With more job options, your employees may leave for higher-paying roles, and those who stay may ask for a raise.

Real estate

Interest rate cuts have implications for property owners. For loans with fixed interest rates, the cost of borrowing does not change when rates fall. However, depending on the terms of the loan, the cost of refinancing and how long the owner intends to occupy the property, refinancing may be an attractive option.

Competition

Lower rates often trigger increased economic activity, spurring the creation of new competitors. Lower rates may make it cheaper for startups to borrow capital. At the same time, existing businesses may decide to expand their operations using low-interest loans or seek cheaper financing to pursue mergers and acquisitions.

Suppliers

As competition increases, you may also see changes in your supply chain. Suppliers may adjust their terms, as well as pricing and servicing options, as the rate’s impact filters through the economy. This is especially likely if new suppliers enter the marketplace or the cost of raw materials falls. Using low-interest loans to stock up on inventory might be helpful in managing your long-term cash flow.

How to respond to the rate cut

As you manage your finances during the rate cut, there are several strategies to keep in mind. One such strategy is to consider refinancing high-interest debt into a lower-interest loan. You could also revisit capital projects you deferred due to high financing costs or replace or lease new equipment at lower rates.

Now also might be an opportune time to expand your operations. Conduct market research to uncover new segments or geographical areas for expansion. With low-cost debt, you can potentially fund growth through mergers and acquisitions.

Finally, if you lease your premises, consider buying a property. If you own property, this could be the right time to refinance to expand or upgrade your facilities and fuel growth.

Ready to find ways for your company to benefit from the rate cut? Our team of trusted advisors can provide expert guidance for managing your business as rates fall. Whether you’re looking to consolidate debt, expand your operations or achieve other financial goals, Northwest’s dedicated team can help.