Interest Rates are Falling; What it Means for Small Businesses
Recently, the Federal Reserve cut short-term interest rates by a one-quarter point following a one-quarter cut in June. After raising rates nine times since December 2015, the Fed has changed its monetary posture due to lower inflation and concerns over a slowing global economy. What does this mean for small businesses and how does it affect their strategic planning for the coming year?
The Banks’ Loss is Small Business’s Gain
The federal funds rate, which is controlled by the Federal Reserve, only affects the short-term rates used by banks. However, it impacts or influences other important rates, such as mortgage rates and commercial loan rates. Generally, lower interest rates are good for small businesses on two fronts. First, lower rates can lower debt costs for businesses with variable rate loans or for businesses taking on new debt. Secondly, lower interest rates can spur business activity when the cost of borrowing for consumer goes down.
Lower Borrowing Costs for Businesses
Most loans held by small businesses have variable rates, which means, as interest rates decline, their borrowing costs will go down, helping to improve their cash flow. When interest rates decline, it also leads to a lower cost of capital that can encourage capital investment for business expansion. Businesses with plans for expansion can access capital at a lower cost, which can improve their return on investment. If rates decline enough, businesses can also lower their borrowing costs by refinancing existing debt.
Lower Borrowing Costs for Consumers
Small businesses also benefit from increased consumer borrowing, which tends to translate into increased consumer spending. Lower borrowing costs free up more disposable income, which is used to buy additional products and services. Plus, lower rates can trigger mortgage refinancing, which can also increase disposable income. Consumer spending drives business activity which drives the economy.
Lower Rates and Expanded Deductions = Opportunity to Expand
The timing of this latest round of rate cuts couldn’t be better for small businesses with plans for expansion. When combined with the more liberal business deductions under the 2017 Tax Cuts and Jobs Act, lower borrowing costs create an attractive opportunity for businesses to grow their business through new equipment purchases. The expanded deductions under Section 179 (immediate expensing of up to $1 million) and Double Bonus Depreciation (immediate 100% deduction), has the potential, along with lower borrowing costs, to drastically improve bottom lines in 2019 and 2020.
Now’s the Time to Consider Year-End Equipment Purchases
Entering the last quarter of 2019, small businesses should take time to reevaluate their borrowing needs in light of their strategic plans, looking for ways to reduce their current borrowing costs through refinancing, and assessing the possible benefits of accelerating their expansion plans through new, lower costs loans. However, it’s never a good idea to look beyond your current plan because if you borrow too much, it could come back to bite you. Interest rates are heading lower for now; but, they will eventually reverse course.
Read other Situation Analysis Articles