Another interest rate cut – here’s what it means for your small business

In this Article:

• How the ‘Interest Rate’ affects small businesses
• Credit card interest rates
• Interest rates on loans
• More interest from investors
• Stronger consumer spending
• Are future cuts on the horizon?
• How can you take advantage of interest rate cuts?

After years of rising interest rates designed to curb inflation, rates are finally on the way down. The Federal Reserve Board of Governors (the ‘Fed’) lowered the federal funds target rate by one-quarter of one percent (25 basis points) on November 7, This is in addition to the 50 basis point cut on September 18. What does the latest cut mean for small businesses? And are more interest rate cuts likely?

Here’s what you need to know. 👇

How the ‘Interest Rate’ affects small businesses

📌 The so-called ‘interest rate’ is not the rate that consumers or businesses pay; rather, it’s the rate that banks pay one another when they borrow money overnight. The thing that affects small businesses is not the actual rate itself (which was cut from a range of 4.75% – 5% to a range of 4.5% – 4.75%) but the direction of that rate.

When the federal funds target rate (sometimes called the fed funds rate) goes down, it becomes less expensive for banks to borrow money overnight. This means their costs go down, so they can, in turn, pay more interest on deposits and/or charge less for loans. As a business owner, this is good news for you.

A decline in the interest rate can affect businesses in several ways.

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Credit card interest rates

📌 Most credit cards have adjustable interest rates, so a decrease in the fed funds rate may lead to a decrease in your credit card rate – but not necessarily right away. Credit card rates are driven by supply and demand, so the rate on your existing card may take a while to change. Rates on new cards may react more quickly to a rate change, so you may want to look at what new cards are charging to determine if it’s worth switching.

Either way, if you carry a balance, you’re not likely to see a big change in your monthly interest charge, but if you keep paying the same amount each month, more of that payment will go to principal than before, so you’ll pay your balance off faster.

📢 Related: 2 Options for business financing: Credit card or loan?

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Interest rates on loans

📌 Changes in the fed funds rate will result in changes in interest rates on loans, no matter which direction rates go. Loan interest rates are dropping, and as long as the Fed continues to cut, they’ll keep dropping. 

If you currently have a business loan that has a variable rate, you may see that rate drop a little bit. If you have a fixed rate business loan, your rate won’t change, but it’s still worth keeping an eye on rates – if they decline enough, it may make sense to refinance that loan.

📢 Related: What is the best bank for your small business?

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More interest from investors

When interest rates are lower, investors have to take on more risk to get the same return. When rates drop, investors can no longer get a guaranteed 5% return on a CD at the bank or a short-term treasury, for example. They will need to take on more risk to earn that 5% return. If you’re seeking venture capital or private equity to grow your business, you may find more investors who are willing to take on the risk associated with a startup.

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Stronger consumer spending

Lower interest rates affect consumer spending and, perhaps even more importantly, consumer confidence. When rates are lower, consumers may see their credit card interest rates go down, and, if they have a variable rate mortgage, they may see their monthly mortgage payment go down as well. This translates into more money in their pockets that they can spend on other things.

Lower interest rates also mean that inflation is moderating, because that’s what prompted the Fed to cut the rate. With lower inflation, prices at the grocery store and the gas pump should stop rising, giving consumers even more breathing room.

Both of these changes can lead consumers to believe that the economy is improving, since lower interest rates and moderate inflation are good news for the economy. This may give them the confidence to make purchases they previously put off, and to spend more on discretionary items.

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Are future cuts on the horizon?

The September rate cut was significant as it was the largest single rate cut since March 2020, and the largest non-COVID-related cut since 2007. The November cut following so soon after is a strong sign that  the Fed expects to continue to lower the fed funds rate. In its updated forecast, also released on September 18, policymakers predicted that the fed funds rate will decrease to 4.4% by the end of the year, which would indicate that there will likely be one more rate cut this year.

📌 Policymakers aren’t the only ones who think rates will continue to drop. Investment research firm Morningstar predicted that the federal funds target rate will be 4.50 - 4.75% by the end of 2024. In 2025, it will continue to drop, reaching 3.00 - 3.25% by December. And by the end of 2026, it will be back down to 2.00 – 2.25%. So, as long as inflation behaves itself, interest rates should continue to fall over the next couple of years.

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How can business owners take advantage of this and future interest rate cuts?

📌 Declining interest rates present opportunities for businesses. Borrowing costs are reduced, so you can borrow more cheaply to expand your business.

Since more cuts are expected, it may be worth waiting to take that loan until rates drop even further, if you can. Of course, if you need that loan to take advantage of an opportunity that won’t wait, shop around for the best rate now. But if it won’t matter much to your plan if you take the loan this year or wait until 2025, it might make financial sense to wait.

With both businesses and consumers feeling more flush due to lower borrowing costs and moderating inflation, it may be a good time to think about expanding your line of products or services. Opening a new location or hiring employees may make sense as well.

💡✍ It’s important to position your business to be able to take advantage of opportunities like lower interest rates. A good way to do that is with business insurance, so you’re protected against the risks you can’t see coming. Find out what kind of insurance your business should have and how much it will cost at hiscox.com.

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