With Rate Cuts Likely, Businesses Should Prepare Now To Borrow

Five Things Business Borrowers Should Have Ready When Applying for a Loan

“The time has come for policy to adjust.” – Jerome Powell, Federal Reserve Chair

Federal Reserve chair Jerome Powell has indicated that the central bank plans to take measures to stave off the weakening of the labor market, a strong signal that interest rates could be cut soon.

“We do not seek or welcome further cooling in labor market conditions,” Powell said in a speech at the Fed’s annual meeting in the Jackson Hole, Wyoming, on Friday, Aug. 23. “The time has come for policy to adjust.”

The adjustment is now verily likely to come at the next Federal Open Market Committee (FOMC) policy meeting (Sept. 17-18, 2024). It would be very surprising at this point if the Fed did not to lower its benchmark Federal Funds Rate.

This is good news for small business owners for two reasons. The first is that inflation has been easing, although it is not yet at the Federal Reserve’s target of two percent. Rising labor, inventory, and fuel costs have cut into the earnings of small business owners – especially those who were reluctant to raise prices during inflationary times to make up the difference.

The second reason is that high post-pandemic interest rates caused many small business owners to put off borrowing for working capital, equipment replacement or expansion. As the Labor Department adjusts previously overstated employment figures and the economy adjusts to layoff announcements from corporations like GM, which announced earlier this week that it will slash over 1,000 software services jobs.

For over a decade, starting shortly after the 2008 stock market crash, interest rates were close to zero. Eventually, they started to climb but held steady during the dark days of the COVID pandemic. However, in 2022, The Fed began a series of rate hikes in an effort to stem soaring inflation.

Although rates stopped climbing and have been holding steady, speculation has grown that a rate cut may be in the works. Many expected it to happen at the last FOMC meeting at the end of July. Since then, unemployment figures have climbed, and inflation has been falling, although it remains above the Fed’s two percent target rate.

So right now, we know that the Fed Chair is likely to announce a rate cut in mid-September at the next FOMC meeting because inflation is easing. That answers Who, What, When, Where, and Why.

The big question remains How Much?

Currently, the Federal Funds Rate is in the 5.25% — 5.5% range. At this point, will a .25% drop be enough to make an impact or will the Fed decide to cut it further?

“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks,” Powell said.

What Business Owners Should Prepare Before Submitting a Loan Application

There is more to applying for business financing than just filling out an application. Banks and other lenders call for the submission of certain documentation in order to fulfill the application process.

Digitization of the lending process has made it easier than ever before to apply for a business loan. They can be submitting with just a click of a mouse and uploaded to the lender’s online loan submission platform. Here is a list of that most borrowers request.

1. Business Plan:

A professionally written business plan defines what the business is and provides a roadmap for where it wants to go. Elements include an Executive Summary (a concise overview of the company, including its mission, product/service offerings, and goals). The plan should also provide a Market Analysis that defines your target audience, competitors, and market trends and a Sales/Marketing Strategy that explains how you plan to attract and retain customers. Importantly, the plan should include detailed revenue, profit, and cash flow forecasts for the next 3-5 years. After all, a lender’s primary concern is whether a borrower will have the money needed to pay the loan back.

2. Financial Documents:

· Bank Statements from the past 6-12 months to demonstrate cash flow and financial stability.

· Profit & Loss Statement (your revenue, expenses, and profits over a period of time).

· Balance Sheet: Assets, liabilities, and owner’s equity.

· Tax Filings

3. Credit Report

Banks typically request your personal credit score. Be sure to review your credit report for any errors before applying for a loan. If your business has a credit history, be sure to address any discrepancies.

4. Legal Documents

Lenders often will want to know the business structure of the firm (LLC, corporation or S-Corp). You may be asked to provide your company’s Articles of Incorporation. Other legal documents often requested are contracts, leases, and professional licenses.

5. Lender Requirements

Each lender has its own requirements for the specific documentation they need in order to process the loan.

Have all required documents ready at the time you submit your loan application to help ensure a smooth process. Having all these documents that a lender asks for will likely improve your chances of being approved for a business loan.