On September 18, 2024, The Federal Reserve Board lowered interest rates for the first time since 2020. The news was met with excitement from banks, real estate moguls, and consumers.
What does the rate cut mean for your small business? In this blog, we’ll dive into the details and the most important takeaways for small business owners.
Impacts of the Interest Rate Cut
The Fed controls rates to create sustainable economic growth. The recent interest rate cut is critical to the economy and helps boost the job market, encourage borrowing, and manage inflation. The most recent cut slashed interest rates by half a point so that federal funds now range from 4.75%–5%. The decision to cut rates was made to restore price stability and balance inflation and unemployment. Inflation has increased over the last few years without a rate cut, and this move shows that the Fed is taking steps to balance the economy.
The Fed sets the short-term borrowing costs for banks. That rate carries over to other consumer-facing products, including mortgages, credit cards, and auto loans. Essentially, when the Fed lowers its rates, banks can also lower the rates they charge customers, leading to lower rates on mortgages — which can lead to substantial savings over a 30-year loan — and lower rates on other loans and variable rate credit cards.
With the Fed showing confidence in a growing economy by cutting the interest rate, many consumers also feel more confident and may increase their spending. While much of the news around interest rates is tied to real estate, rate drops can benefit people in all demographics and industries as long as they maintain healthy personal and business credit scores.
What This Means for You as a Small Business Owner
A rate cut helps consumers, but what does this all mean for small business owners? The lower rate impacts your ability to access financial tools to grow your business and can make some financial resources more accessible. As with consumer products, a rate cut benefits small business owners who have strong credit scores and are financially responsible.
Here are three key ways the Fed rate cut can benefit small business owners:
- Business credit cards. Many business credit cards have variable rates, which means a lower Fed rate should also decrease the credit card interest rate. A lower credit card rate means more of the payment will go to the principal, meaning it will be easier and less expensive to pay down credit cards. Lower rates can also lead to more credit card offers. Credit cards with fixed rates likely won’t see much of a change.
- Small business loans. Interest rates on small business loans have increased steadily over the last few years (moving from an average of 4.1% in July 2020 to 9.5% in August 2024). High rates make it challenging for entrepreneurs to secure financing, especially for businesses just getting off the ground. But a lower Fed rate likely means small business loan rates will also fall, making it less expensive (and less risky) to secure a loan for everything from real estate to additional inventory.
- Business checking account. The Fed rate cut will likely have a slight impact on business checking accounts by making them more accessible. As small business owners build credit through lowered credit card and loan rates, they will have more options for checking accounts. Business savings accounts and Certificates of Deposit (CDs) may see a decrease in their interest rates to match the lower Fed rates.
You will likely get lower rates as you build your business credit and gain financial credibility. That’s because financing and loans are based on risk. The less risky your business is, the more likely you are to qualify for a better rate. Learn more about business credit reporting, and how to strengthen your business credit score here.
The recent Fed rate cut is good news for consumers and small business owners. By staying financially responsible and building strong business credit, you can take advantage of tools with lower rates to grow your business.
Disclaimer: Fundbox and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal, and accounting advisors before engaging in any transaction.
