How Will Dropping Interest Rates Impact My Business

How will dropping interest rates impact my business?

How the Fed’s interest rate cut could affect borrowing costs, real estate and your business’s financial future.

Key takeaways:

• On September 18, 2024, the Federal Reserve (the Fed) announced its decision to reduce interest rates by 50 basis points, or 0.5%.
• 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 0.5% during its last meeting, providing a welcome break for businesses of all sizes. Lowering the rate has a domino effect on the benchmarks used to establish business and consumer debt interest rates. As a result, these rates are expected to drop in the coming weeks and months.

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

As businesses prepare for the effects of the rate cut, you’ll likely notice a change in your 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.

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 now that 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.

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 tradeoff: 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 both property owners and renters. 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 also 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 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.