Low interest rates provide a golden opportunity to consolidate financial obligations and benefit from growth. The federal funds rate is the most important rate of them all as it is the rate the big banks pay for overnight borrowing. This rate dictates the prime rate as well as additional interest rates. In short, the fed funds rate shapes the economy, particularly for business owners.
Borrowing as a Business Owner
Though low rates are conducive to borrowing, banks have the potential to minimize lending to comparably small businesses to mitigate risk across posterity and also decrease the aggregate number of loans written. Now that rates are low, there is the potential for “cheap money” borrowing in which business owners take out a loan with minimal interest, use it to grow their business and gradually pay it back.
Low interest rates are particularly helpful for those who have a fantastic credit score. If your credit score is above average or excellent, the current low rates present an opportunity to borrow money cheaply and expedite your company’s growth. There is also an opportunity to consolidate prior debts with a new loan at a low interest rate. Seek out low interest lines of credit or refinance current loans, shift money to overhead expenses, onboarding new employees or growing the business and the stage will be set for increased profitability.
The Problem With Low Rate Borrowing
Low rates are certainly tempting yet they have the potential to become a trap of sorts. Especially low rates encourage business owners to spend a significant amount of money, much of which is borrowed. If this borrowed money is spent to offset a slowdown in sales, the bottom line might not return to normal until months or years pass. This means businesses that are dependent on individual spending will likely continue to struggle as long as the economy is mired in a slump. However, businesses that sell to other businesses, governments or other clients aside from everyday consumers might find it makes sense to borrow large amounts of money when rates are low as the target client is not primarily dependent on a bustling economy.
Stimulating the Economy Starts With Businesses
A stimulus plan has the potential to make conventional lending that much more difficult as banks are stretched thin in terms of administrative responsibilities and personnel. However, businesses will still likely be able to access an infusion of capital from local banks, even if the rates are not as low as expected.
Add in the fact that creditworthiness plays a part in loan rates along with approval for funds and there is even more to consider. Crunch the numbers with the assistance of a financial advisor to determine if it makes sense to take out a business loan at the current low rates and act accordingly. Even if you suspect your credit is not the best and the interest rate on a loan might be higher than in previous months, you owe it to yourself, your employees and the future of your business to determine whether now is the optimal time to borrow.
Any opinions are those of Paramount Wealth Management and not necessarily those of RJFS or Raymond James.
Any information is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. Investments mentioned may not be suitable for all investors. Lending Services provided by Raymond James Bank N.A. a fully chartered national bank affiliated with Raymond James Financial Services.