Education | May 06, 2024

What Do Dropping Interest Rates Mean for Your Business

It’s no secret that the past few years have been tough on small and medium-sized businesses. Not only have supply and labor costs skyrocketed, an elevated rate environment has also hampered growth.

But the tough times won’t last forever. While the Fed has not yet announced plans to decrease interest rates, inflation is projected to fall back to its baseline of around 2% by the end of 2024, which may usher in rate cuts. That means businesses have an opportunity to strategize now, so they can act swiftly when the Fed does eventually reduce rates.

We’re here to help with your planning. Read on to learn how rate cuts may impact your business, as well as three strategies you can leverage to set your business up for success.


The cost of capital goes down

At a basic level, lowered interest rates reduce the cost of borrowing money, so it becomes more cost-effective to leverage capital to invest in your business. As a result, businesses burdened with higher interest costs in the elevated rate environment may see some relief, spurring a new round of investment and innovation.

“Many businesses today could be spending thousands of dollars a month servicing debt. When the rate goes down, that’s money that stays in your business,” says Bryan Jasin, Head of Regional Commercial Banking at Northwest Bank. “It’s more money to spend on inventory, invest in a new line of business or just take care of you and your family.”

Accessing capital becomes easier

Rate cuts don’t just make capital less expensive, they also make it easier to access. “The elevated interest rate has been difficult for financial institutions, and we saw a lot of smaller banks fail,” says Jasin. “That put the onus on lenders to take a critical look at their portfolios and many stopped lending.”

When rates drop, however, you may find it easier to secure a business loan or be able to qualify for more capital than you would have in an elevated rate environment.

Business valuations increase

If courting investors is part of your business plan, rate cuts can signal sunnier days ahead. Startup funding was hit hard in 2023, dropping 38% year over year, due in part to the high cost of capital. But buyers are slowly trickling into the market, boosting business valuations along the way, says Jasin.

“When interest rates go down, investor activity goes up because investors see more opportunities to generate higher returns and they have more capacity to borrow,” he explains. “Many business owners saw their valuations fall in the past few years, but we’ll see them ticking up again when rates decrease.”

Consumers gain optimism, too

Investors and entrepreneurs aren’t the only ones who gain capacity when rates go down — businesses can expect to see a surge in consumer behavior, too.

“When times are good, people go out to spend. They’re buying that new car, they’re booking that vacation, they’re going out to shop at the small and medium businesses in their community,” says Jasin.

How to prepare your business for the upcoming rate cuts

Every business — and every business strategy — is different. But Jasin recommends these strategies to plan for interest rate cuts and position your business to succeed in a lower-rate environment.

1.     Start with the fundamentals

As lender activity begins to warm back up, businesses can maximize their chances of approval by demonstrating solid financial fundamentals, says Jasin.

“Now’s the time to do your spring cleaning,” he advises. “Make sure you’re up to date with your monthly profit and loss statements and balance sheets and are able to demonstrate a strong understanding of the financial metrics of your business.”

Lenders will require these financial documents when they review your application, so having them ready to go gets the application process off to a strong start. Keeping in touch with these fundamentals also allows you to gain insights into your baseline going into a lower rate environment, so you can set benchmarks and realistic goals.

2.     Look beyond the top line

Every business wants to see revenues grow over time and a lower rate environment will stimulate the economy, helping you attract more business. However, as inflation remains elevated, businesses should look for ways to balance growth with profitability.

“We’re seeing a lot of businesses that have increased their revenue, but, thanks to inflation, their profits have stayed flat,” says Jasin. “The cost of supplies and the cost of doing business have gone up so much that some of these businesses are even losing money.”

As you develop a plan to invest in your business, Jasin recommends looking for opportunities to manage costs — such as renegotiating contracts with suppliers — to ensure your plan boosts profitability as well as revenue.

3.     Focus on forecasting

Finally, Jasin recommends revisiting your sales forecasting with the changing economic conditions in mind.

Strong forecasting not only helps ensure you can meet customer demand, it also helps reduce the risk that you’ll order too much inventory and undermine your profitability. What’s more, demand forecasting helps you predict when you’ll need to increase headcount, so you can start your talent search early.

While some business owners make strong predictions based on a gut feeling, you can also delve into the data for help creating your forecast. Your website traffic, customer phone calls and Google Trends offer insights into customer interest in your area so you can plan accordingly.

The bottom line

Changing economic conditions create new opportunities for your business to stand out — and refining your business strategy and financial plan will prepare you to act when the time is right.

“Spending just a couple hours working on your business over the weekend can generate huge rewards,” says Jasin. “You can map out your options and know which levers to pull to be successful when rates change.”

Talking to a trusted financial partner can help, and Northwest Bank’s dedicated small business banking team can work with you to map out your next steps and connect you with the solutions you need to reach your goals. To learn more, connect with Northwest Bank’s small business banking team.

Related News