3 Tips for Small Business Borrowers in a High Interest Rate Environment

As we enter 2024, there are signs that inflation may ease, giving borrowers hope that interest rate cuts are on the horizon. Four months into the year, inflation remains low and Federal Reserve Chairman Jerome Powell has muted any discussion of rate cuts.

Chairman Powell said after the Federal Open Market Committee meeting on Wednesday, May 1, “Recent months have shown that inflation is not making further progress toward the 2% goal.'' “This will likely take longer than previously expected.”

Powell said recent indicators suggest economic activity continues to expand at a steady pace. Employment growth remains strong and unemployment remains low. However, the Fed believes the country's economic outlook is uncertain and the FOMC remains highly alert to inflation risks. As a result, the Committee decided to maintain the federal funds rate at its current level of 5 1/4 to 5 1/2 percent.

“The Committee remains strongly committed to returning inflation to its 2% target.As it evaluates the appropriate stance for monetary policy, the Committee will continue to monitor the impact of incoming information on the economic outlook. “We will continue to monitor the Fed closely,” he said, adding that the Fed stands ready to adjust monetary policy if conditions prevent it from achieving its goals.

The FOMC's assessment considers a wide range of data, including labor market conditions, inflation pressures and expectations, and financial and international developments.

As interest rates rise to 20-year highs, many small business owners are putting off borrowing to upgrade or expand their businesses because the cost of capital is too high. But at some point, business owners may no longer be able to wait. Here are some guidelines to help you make that decision.

1. If you think you have a chance to grow your business, don't sit still. Don't wait for a Fed rate cut that may never happen. Those who decided to borrow by waiting for interest rates to fall will be sitting idle from late July 2023. opportunity cost Do nothing. Have you ever passed up on a real estate purchase or rental agreement to build a new facility because you thought the cost of capital was too high? If you had borrowed money last summer, the facility was already up and running or soon to be up and running. I might have done it. If that was a lucrative location, they would have missed a huge opportunity by trying to keep Fed policymakers waiting.
2. Let's go shopping. Look for the best deal whether the country has a high or low interest rate environment. SBA lending is strong and with support from the agency, approved SBA lenders are making loans to eligible borrowers. If your credit score isn't great, you can seek funding from non-bank financial institutions, such as online lending platforms. Interest rates are higher than bank term loans or SBA loans, but non-bank lenders are usually willing to provide funding even if the equity is high.
3. Streamline your operations. Are you as lean as possible without hindering the flow of business? If you need to borrow money to replace aging equipment, expand your business, or open a new location, interest rates will likely rise for a while. It is important to understand what to expect. Given the rising cost of capital, look for ways to reduce costs in other areas, such as reducing inventory levels, negotiating with existing vendors, and finding new suppliers that can offer more attractive deals.

These are not easy times for small business borrowers. Some local banks are cutting back on lending in part because of the commercial real estate woes. Big banks, which have long been stingy with lending to small businesses, are unlikely to open up their wallets if high interest rates put their securities in jeopardy.

In this environment, small business owners must 1) decide when to borrow, 2) shop around for reasonable deals, and 3) look for savings elsewhere if the cost of capital remains high. there is. Given Chairman Jerome Powell's comments on May 1, high interest rates are unlikely to come down anytime soon.