Three Tips For Small Business Borrowers In A High Interest Environment

Entering 2024, indications were that inflation might be easing, and borrowers became hopeful that interest rate cuts would be on the horizon. Now, four months into the year, inflation remains sticky, and Federal Reserve Chair Jerome Powell has suppressed talk about rate cuts.

“In recent months, inflation has shown a lack of further progress toward our 2% objective,” Powell said following the Federal Open Markets Committee meeting on Wednesday, May 1. “(Interest rate cuts) will take longer than previously expected.”

Powell said recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains remain strong, and the unemployment rate is still low. Yet, the Fed believes that the country’s economic outlook is uncertain, and the FOMC remains highly attentive to inflation risks. As a result, the committee decided to keep the federal funds rate at its current level of 5 1/4 to 5 1/2%.

“The Committee is strongly committed to returning inflation to its 2% objective. In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook,” Powell said, adding that the Fed is prepared to adjust monetary policy if developments impede the attainment of its goals.

The FOMC’s assessments take into account a wide range of data, including labor market conditions, inflation pressures and expectations, and financial and international developments.

As interest rates soared to their highest level in two decades, many small business owners have put off borrowing money for upgrades and expansion because the cost of capital is too much. At some point, however, business owners may no longer be able to wait. Here are some guidelines for making that decision.

1. Don’t sit tight if you see an opportunity to grow your business. Do not wait for a Federal Reserve interest rate cut that may not occur. Anyone who has made their decision on borrowing on waiting for interest rates to decline has been sitting idle since late July of 2023. Examine the opportunity costs of doing nothing. Will you miss out on buying a property or signing a lease to build a new facility because you think the cost of capital is too high? Had you borrowed the money last summer, your facility might be operational already or very soon. If the location were a lucrative one, then you have lost out on a big opportunity by trying to wait out the Fed policymakers.
2. Shop around. Whether the country is in a high or low interest rate environment, look for the best deals. SBA lending is robust, and with the government backing that comes from the agency, approved SBA lenders are making loans to qualified borrowers. If your credit is less than stellar, you can search for capital from non-bank lenders, including online lending platforms. While the rates will be higher than bank term loans and SBA loans, non-bank lenders are usually willing to provide funding, albeit at a higher coast of capital.
3. Streamline your operation. Are you as lean as you can be without hampering an influx of business? If you need to borrow money to replace aging equipment, expand your operation, or open a new location, it’s important to understand that higher interest rates appear to be on the horizon for a while. Factor in the higher cost of capital and look for ways to cut costs in other areas, such as reducing inventory levels, negotiating with existing vendors or looking for new suppliers who can offer more attractive deals.

It’s not an easy time for small business borrowers. Some regional banks are pulling back from lending, in part, because of commercial real estate woes. Big banks that have long been stingy in lending to small businesses are unlikely to open their purse strings wider if their own securities are under water because of high interest rates.

In this environment, small business owners must 1) decide when they will pull the trigger on borrowing money, 2) shop around for reasonable deals, and 3) look for savings elsewhere if the cost of capital remains high. Given Jerome Powell’s comments on May 1, high interest rates are likely not getting lower anytime soon.