Key Considerations for Small Businesses in a Declining Interest Rate Environment

The long-anticipated decision by the Federal Reserve to cut interest rates arrived in September, bringing with it some much anticipated relief for both businesses and consumers.

The Fed’s focus on lowering rates between now and this time next year should quickly improve liquidity, confidence, and optimism for businesses, which helps move the markets and commerce. While the Fed did not explicitly state the pace it will continue to ease the cost of debt, the central bank is expected to keep lowering rates through the remainder of 2024 and into 2025.

As we enter a declining interest rate environment after a prolonged period of higher rates and inflation, businesses must strategically adjust to take advantage. Here are a few considerations for small businesses as they navigate these changes.

1. Boost to Business and Consumer Confidence

The economic pressures of the past few years have had a major impact on both consumers and businesses, with a recent WSFS Bank Money trends survey revealing that 33% of regional consumers said they’re cutting back on non-essential spending.

Lower interest rates can stimulate economic activity by encouraging consumers to make purchases, and enable businesses to invest in growth and unlock opportunities to borrow more easily.

As borrowing costs decrease, businesses should be prepared for increased consumer demand, especially in sectors like retail and services, particularly as we head into the busy holiday season.

2. Reduced Borrowing Costs

With rates beginning to decline and borrowing becoming cheaper, business owners will be able to more easily finance projects to re-invest in their companies, purchase inventory and fund expansion opportunities at lower costs. Many businesses postponed financing needs while rates were elevated, so now could be an opportune time for businesses to begin investing in growth initiatives again.

Lower rates can also help free up additional cash flow for your business, which can enable you to be nimbler in responding to market disruption and opportunities. For businesses with short-term cash flow needs, having available lines of credit and increasing those appropriately can help keep cash flowing while also becoming less expensive to maintain as rates decrease.

3. Improved Profit Margins

Many small businesses operate with already thin profit margins, and increased borrowing and material costs over the past few years have certainly impacted them.

With lower borrowing costs becoming available, businesses with existing loans will see opportunities to reduce debt servicing expenses and improve their profitability. New financing will also become more affordable for small businesses, leading to enhanced margins in the future.

As rates decline, companies should evaluate their current debt structures and look for opportunities to refinance and optimize their balance sheets. Speaking with your trusted advisors, such as your accountant, banker and attorney, can be a good way to evaluate your opportunities.

4. Refinancing Opportunities

The declining rate environment also presents a perfect opportunity for businesses to refinance existing high-interest loans, freeing up cash flow and reducing financial pressures.

Refinancing can be especially valuable for businesses who also own their real estate, as they can benefit from lower mortgage rates, making it cheaper to acquire new property or to invest in improvements to existing facilities.

The current declining rate environment will have far-reaching effects for small businesses in the coming weeks and months, as markets and main street digest the shifts in monetary policy.

Each small business is unique and certain industries tend to outperform in a declining rate environment due to the positive effects of lower interest rates on cost structures, profitability, and demand for their products or services. Consider setting time with your banker and other advisors to develop proactive strategies to optimize borrowing, manage risk, and differentiate offerings in this rapidly shifting economic landscape.