October 2024 Insight - Interest Rates and the Impact on Small Businesses

Interest rates have been a hot topic for small businesses recently, especially after the federal funds rate hit a 23-year high in July 2023. While the Federal Reserve finally cut rates by 0.5% in September 2024, small business owners are still dealing with the impacts of these rate changes. So, how do these fluctuations affect your business, and what should you be aware of?

What Are Fed Rates?

The Federal Funds rate, set by the Federal Open Market Committee (FOMC), is the rate that the Federal Reserve charges to banks to borrow funds. The Federal Funds rate influences borrowing costs for banks and, ultimately, for consumers and businesses. When the rate rises, borrowing becomes more expensive to slow inflation. When it drops, borrowing becomes cheaper to stimulate the economy. 

How Do High Interest Rates Affect Small Businesses?

High interest rates make borrowing more costly, leading many small businesses to delay expansion or spend more on loan repayments. Consumers, too, feel the pinch as higher loan costs reduce their disposable income, cutting into business revenues. Managing cash flow becomes critical in these times—evaluating debt repayments, pricing, and negotiating better payment terms can help.

What Happens When Rates Fall?

When interest rates drop, borrowing becomes more affordable, and consumer spending usually increases. This boost can help businesses grow, increase sales, and pay down debt faster. For small businesses, lower rates often mean better access to credit and more opportunities for investment.

Tips for Navigating Rate Changes

Whether rates are high or low, it’s essential to manage your cash flow effectively, review customer creditworthiness, and consider all financing options. As rates shift, stay informed and plan strategically to maintain your business's financial health.

Interest rates will continue to fluctuate, so being proactive in managing your business finances can help you thrive through these changes. For purchasers, looking for alternatives to bank loans or SBA loans could help ensure that the payment structure of your purchase is sustainable. An experienced business broker can help you navigate the best way to finance a business purchase. Click HERE to schedule a time with one of our experienced intermediaries so you can achieve your goal of business ownership!