Key Highlights

  • Interest rate cuts: The Federal Reserve is expected to announce a cut in interest rates this year, ranging from a quarter to half a percentage point. This is a positive change after years of high rates aimed at controlling this country’s inflation.
  • Impact on loans: Small businesses should consider refinancing their existing loans at lower rates. This applies to both fixed and variable rate loans, as well as personal mortgages.
  • Revisit your investments: Lower interest rates may make certain investments, like purchasing equipment or property, more feasible for small businesses. Be sure to revisit any past financial analyses and investments you’ve made.
  • New loan opportunities: With lower interest rates, it’s a good time to explore loans from traditional banks, community banks, credit unions, and the Small Business Administration (SBA). The SBA guarantees loans through its network of banks, making it easier for small businesses to secure financing.
  • Investment yields decreasing: While lower interest rates are beneficial for borrowing, it also means lower yields on savings like CDs and annuities. Businesses should consider locking in current rates before they decrease further.

Transcript

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Gene (00:01):

Hey everybody, it’s Gene Marks and welcome to another episode of The Hartford’s Small Biz Ahead Podcast. Thank you so much for joining me. Interest rates are coming down as I’m recording this. We are anxiously waiting for the Federal Reserve to announce a cut in interest rates. It is expected this week. The cut will be anywhere from a quarter of a basis, point to half a basis point. Remember, a basis point is a percentages like 1%, so it’s either a quarter of a percent or half a percent is what that rate will be. Regardless of whether it is a quarter of a percent or a half a percent, it’s a step in the right direction. For the past couple of years, we have seen interest rates not only increase, but also stay at historically high levels, at least higher levels than it’s been over the past few decades while the Fed has been doing everything it can to get its arms around inflation.

Gene (00:49):

But now that inflation appears to be coming down and more under control and the economy itself is in a decent spot, the Federal Reserve will be lowering rates. And so what does that mean? Well, it means a lot for us as businesses and it doesn’t mean anything at all. Lemme start with it doesn’t mean anything at all. Okay? First of all, a quarter of a percentage point cut or a half a percentage point cut is not going to turn your world upside down. We went from around 2% interest rates all the way up to 8.5%. That’s the prime rate now. So, a quarter of a percentage point isn’t again, going to completely knock your socks off or make enormous changes in the way that you’re doing business. Having said that, though, it does have an impact and it does some, open up some opportunities for us that we should be taking advantage of.

Gene (01:34):

And let me explain to you what I mean by those opportunities. For example, if you do have any existing loans that are at a fixed rate of interest or even a variable rate of interest, it’s now time to talk to your banker about refinancing that loan. If it is at a higher rate because you got it within the past couple of years. Fair enough, same thing by the way. If you bought a house, or did something personally at a higher mortgage rate, now is the time where you might want to consider refinancing it. Be aware we’re not done yet. There is more interest rate reductions to come. Every time you do refinance, you will be paying fees. So, you want to be aware of whether or not the fees themselves are going to have an impact on, whether it makes sense to refinance now or wait until sometime in the future.

Gene (02:18):

But refinancing is not a bad option to make. And I think that as soon as the Fed announces their increase, I think you should be on the phone with your banker. Take a look at all the debt that you owe your banker and say, what now can we do with interest rates lower that can benefit my business? So that’s number one. Number two, because of lower interest rates, it may be time or getting closer to your time to dust off those spreadsheets that you used when you tried to do things in the past that you didn’t accomplish because the rates were too high, maybe in the past couple years you wanted to buy a piece of equipment or a piece of property or a machine or add on a building or buy another business or do something

Gene (02:58):

Like that. And when you did your analysis with your financial people, you realize that that current interest rate environment, it just was not going to provide the return on investment. It would make it difficult to afford and therefore that was you decided not to do it. Well, I’m telling you now, it might time to decide to do it. So, you might want to dust off those spreadsheets, revisit some of those older deals, particularly in a new interest rate environment and consider that for sure. Next has to do with getting loans. Now, there are still two places to go and get loans outside of traditional banks that you want to consider. First of all, you can go to traditional banks, you can go to community banks, you can go to credit unions that are looking to do business with businesses. And you’ll find that those rates will start to creep down from that eight and a half percent prime rate.

Gene (03:48):

And that might make these loans more attractive for you. So that’s certainly good. But by all means, definitely go to the small business administration. That’s the SBA at sba.gov. Talk to an SBA banker and they have a network of hundreds of banks around the country, that will not only give loans at market rates, which are now more attractive as interest rates go down, but also there loans are guaranteed. And these people have quotas they’ve got to fill. So, they look for businesses to loan money too. And they’re not necessarily looking just for startups or independent contractors or freelancers. They love to loan money to businesses with employees and infrastructure and assets and cash flow and historical financial statements. And if that’s you in a lower interest rate environment, that improves your chances of getting that loan from the SBA from a community, not the SBA doesn’t give loans.

Gene (04:41):

They guarantee the loans, but through one of their member banks, or even a traditional bank or credit union or community or independent banks. So time to revisit new financing as well could be on the table. And one final thing, interest rates are coming down. That’s good news. What’s not good news is that the rates of interest that were being paid on certificates and deposits and multi-year annuities and treasuries, those rates themselves are also going to be coming down, which means that your yields are going to come down and your rate of return on those assets are going to decrease. But even though the rates are going to likely to come down even more expected in 2025, right now, the decreases not that much. So, it’s still a good time to put your illiquid cash, the money that you don’t need into a CD, lock it up for four or five years, order a treasury or to a multi-year annuity. Right now, as I speak those, some of those assets are paying anywhere from five to 6% in interest and inflation is only a 3%. So, it’s a pretty darn good deal if you’re getting something that’s twice the rate of inflation. Now those rates of interest are going to start decreasing pretty darn soon if they haven’t already.

Gene (05:56):

Now is the time to consider putting some of that non-liquid cash into those assets so you can use them and get some kind of a return on investment. But as we get into an environment of declining interest rates, so in summary, it looks like interest rates are coming down. It’s not going to be a dramatic impact on your business, but it’s certainly a step in the right direction. Look and talk to your existing bankers about refinancing your existing loans that you might have under higher fixed interest rates. Review any prior deals you might have wanted to do but didn’t do because rates were too high, they might provide return on investment. Now talk to the SBA or the SBA banker network sba.gov. Now it’s even more attractive to get a loan from an SBA member bank or a community bank or an independent bank, or even a traditional bank as well.

Gene (06:48):

New financing is there. Oh, and I didn’t mention as well, there was a great private market for loans as well. Companies like Lendio and Kiva and Funbox and others like them, this private lending market will lend capital, plenty of capital to businesses like yours and mine. The issue is, is whether or not, they can,  the interest rates themselves are certainly higher, much higher than what you would get at a bank. But now with interest rates coming down, even the private lenders will have reduced interest rates, which might become more attractive to you. And finally, interest rates coming down is good, but on the other side of things, that means that the interest that you can earn on your assets will also come down now because the increase wasn’t so dramatic right now. It’s going to continue, I think, into 2025. You should be considering to investing, putting your illiquid non-liquid non-used cash into things like CDs, into multi-year annuities, or into treasuries where you can lock in still high interest rates while they last. So, consider doing that as well. You’ve been listening to The Hartford’s Small Biz Ahead Podcast. If you need any help or tips or advice in running your business, please visit us at smallbizahead.com, sorry, or the SBA.hartford.com. My name is Gene Marks. Thank you so much for listening. I’ll be back with you next week with some more advice on helping you run your business. Look forward to speaking with you then. Take care.

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