How Small Business Owners and Entrepreneurs Can Capitalize on the Fed's Rate Cut
Commercial Credit, Small Business Credit
What lower rates and one click credit platforms mean for SMEs
On July 31, the Federal Reserve did something it hasn’t done in 11 years: it cut the federal funds rate by 25 basis points, to a target rate of 2.0 percent to 2.25 percent. The Federal Open Market Committee voted by a wide margin to lower rates as a precaution against signs that the US economy may be slowing after an unprecedented expansion.
The last time the FOMC cut rates was in December 2008. At the time, the US economy was deep in a financial crisis. This interest rate cut is different. It’s an anticipatory move intended to keep the economy rolling in the face of global and trade headwinds. Meanwhile, the latest indicators are signaling another cut in September.
So, what does that mean for owners and operators of small businesses?
To start, it means the cost of capital just got cheaper — and for small business owners that is empowering. Lenders are going to lend money for less as the prime rate falls or at least give borrowers better terms. Cuts can be a boon for existing businesses and encourage more individuals to take the plunge and join the entrepreneurial class.
Just as lower rates make it cheaper to borrow, so does new technology. Advances in digital lending have lowered costs and created a growing group of fintech companies offering small business loans. We’re providing lenders with services like one-click credit platforms and automated data sharing tools to help them meet the capital needs of small businesses.
In fact, the share of applicants who sought loans, lines of credit, or cash advances from online lenders has grown markedly, according to the Federal Reserve Small Business Credit Survey. Applicants cite speed and a higher probability of getting a loan as top factors influencing their decision to go online for their financing needs.
If you’re looking to take advantage of lower rates and these new lending options, it’s important to remember that rate cuts are stimulative. There’s a reason the Fed made this move right now. Though the economic expansion has been the longest on record, signs of a slowdown are creeping into the data and escalating trade tensions with China and others are creating an uncertain environment.
It’s a good time to review your finances and recession-proof your business when slowdown concerns merge. Some owners may choose to use the reduced rates to refinance, consolidate or pay down outstanding debt entirely. Holding operating expenses steady (especially if you opt to grow the business with this newfound financial muscle) and keeping some powder dry in case things turn for the worse should be top priorities.
Finally, keep an eye on the dollar. Many small businesses have exposure to foreign markets and currency exchange rates. Rate cuts typically weaken the US dollar, and that’s good for US businesses, especially those with sales and/or supply chains overseas.
A weaker dollar could have a secondary benefit of mitigating some of the effects of the current trade war with China; as the price of US goods fall and become more attractive, it cuts into the market for Chinese-produced brands and boosts foreign sales for US-based firms.
Ultimately, the Fed understands that small business is the engine that drives the US economy and will do whatever it thinks best to keep it running smoothly. Capital fuels small businesses and a growing number of lenders are jumping in to serve this critical market. For small businesses looking to make the move to grow their companies, this rate cut could be a golden opportunity.