As 2024 began, there were signs that inflation might be subsiding, raising hopes among small business borrowers of impending interest rate reductions. However, four months into the year, inflation continues to persist.
According to Federal Reserve Chair Jerome Powell, economic indicators continue to show solid expansion, with strong job growth and a low unemployment rate. However, he highlighted the uncertainty surrounding the economic outlook and the Fed’s continued vigilance regarding inflation risks. Consequently, the committee has decided to maintain the federal funds rate at its current range of 5 1/4 to 5 1/2%.
The FOMC’s evaluations consider a broad spectrum of data, encompassing labor market trends, inflationary pressures and forecasts, as well as financial and international developments.
With interest rates reaching their highest point in twenty years, numerous small business owners have deferred borrowing for improvements and expansion due to the prohibitive cost of capital. However, there may come a time when delaying further is not an option. Here are some strategies to help business owners decide when to make that move.
Here are some tips for small businesses looking to borrow money.
If you spot a chance to expand your business, don’t hesitate.
Relying on a potential Federal Reserve interest rate cut, which may not come, could be a strategic misstep. Those who have postponed borrowing since late July 2023, waiting for rates to drop, have remained inactive. Consider the potential losses from inaction. Could you miss the opportunity to purchase property or sign a lease for a new facility, assuming the cost of capital is currently too high? If you had taken out a loan last summer, your facility might already be up and running, or close to it, especially if it’s in a promising location—meaning, by waiting, you might be missing out on significant opportunities.
Shop around for the best financing options.
Whether interest rates are high or low, it’s crucial to seek out the most favorable terms. SBA lending remains strong, and with federal backing, approved SBA lenders are actively providing loans to eligible borrowers. If your credit is less than perfect, consider exploring capital from non-bank lenders, including online platforms. While these options may come with higher rates than traditional bank loans and SBA offerings, non-bank lenders are often more flexible in providing funding, albeit at a higher cost.
Streamline your operations.
Make sure your business is as efficient as possible without restricting potential growth. If you need to invest in replacing outdated equipment, expanding your business, or opening a new site, be mindful that higher interest rates may persist. Account for the elevated cost of capital and identify ways to reduce expenses elsewhere, like lowering inventory levels, renegotiating with current vendors, or finding new suppliers offering better terms.
This is a challenging period for small business borrowers. Some regional banks have reduced their lending activities, partly due to troubles in the commercial real estate sector.
Additionally, large banks, which have historically been reluctant to lend to small businesses, are unlikely to increase their lending if their own investments are performing poorly due to high interest rates.
In today’s economic environment, small business owners need to 1) determine the right time to borrow money, 2) search for favorable financing options, and 3) find ways to save if capital costs stay elevated.