Wednesday, August 10, 2022
Cash FlowSmall Businesses Benefit from Fed's Low Rates

Small Businesses Benefit from Fed’s Low Rates


I would imagine that there are many small businesses across America that have never heard of the Federal Reserve Board (the “Fed”), and most, one would assume, have no idea of what they do, especially for the small business community. Borrowing money for your company comes at a cost, and that cost is interest, and the lower the interest rate the more money that can flow into the economy to produce goods and services.

At the most recent Federal Reserve meeting in December, the Fed has said that it will not raise rates at this time and does not foresee raising interest rates in 2020 either. Fed Chairman Jerome Powell said during his press conference that the Fed’s interest rate policy would remain similar unless inflation rose significantly. He believes “our economic outlook remains a favorable one.”

In fact, the current economic expansion, now in its 11th year, is the longest in history. In addition, the stock market has now gone up 10,000 points since Trump came into office. Is that factored into the impeachment process?

United States Federal Funds Rate

The labor market has remained strong and economic activity has risen at a moderate rate. Inflation is a bit less than the target rate of 2 percent, and the Fed reports that longer-term inflation expectations are little changed. The economic benefit to business is obvious. Lower rates are beneficial for small business loans, which often are variable rate loans.

Cutting rates reduces the cost of borrowing. Thus, many business owners are willing to reinvest in their firms because there is less risk involved. This creates a win-win scenario in which companies gain from financial growth and the overall economy increases resulting from small business job growth.

So just how much money are we talking about? With large financial institutions leading the way, the approval percentage for small business loan applications at big banks ($10 billion+ in assets) inched up one-tenth of a percent to reach 28.1% in November 2019, a new post-recession high, according to the Biz2Credit Small Business Lending Index.

Interest rate cuts by the Federal Reserve, optimism among small business owners, and an overall strong economy account for an incredibly strong period for small business lending. If you are a small business owner considering investing money in your firm, you may not see a time better than now.

It’s not just the big banks doing the lending. Small banks continue to approve more loan requests than they reject for both traditional bank loans and SBA loans. As business owners look ahead and consider their growth path for 2020, one would expect that small business lending at regional and community banks will be strong into the foreseeable future.

Everyone from Google to Bank of America has come on the lending train and finally realized that money can be made in the small business realm. Big tech like Google has the twin benefit of obtaining additional data on the businesses they work with. This certainly will help Google, and the company states that by knowing more about their customers, they can use algorithms in areas such as inventory analysis and sales to further small business growth.

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