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If there’s one thing economists are sure of this year, it’s that interest rates are falling. Federal Reserve officials have also been candid about their plans to lower short-term rates by at least three-quarters of a percentage point. It will be easier to obtain financing and credit, but how can you benefit from it? As Instawork’s Chief Economist, here are some of my tips for preparing:
Distinguish between short-term and long-term rates. Short-term interest rates fell in anticipation of the Fed’s moves, but long-term rates actually began to rise in late 2023. With ever-increasing Treasury debt to finance the federal government’s debts, there is It’s a lot of demand for long-term credit. Additionally, the Fed has been selling off its long-term assets, which drains the money supply on that side of the market.
These moves have direct implications for businesses as long-term rates are what determine the cost of borrowing for capital expenditures. So if you’re planning to seek financing for a new factory, a renovation of your offices or expansion into a new market, keep an eye out for rates that correspond to the time after which you’ll repay.
Related: Where will the economy go next? What to watch out for in 2024
Choose the right time to raise funds. If you’re considering an initial public offering (IPO) or tapping another funding source, two things will influence optimal timing: the growth of your business and competing options for returns. The best time usually comes when growth is high and other possible investments pay low rates.
The economy has been growing quite rapidly and expectations are for continued moderate growth this year. But it could take a couple of years for interest rates to fall to pre-Covid-19 “easy money” levels, if they ever do. No one knows what will happen after the November election, but companies considering an IPO could be rewarded for waiting.
Refinance debt whenever possible. Just as homeowners flock to refinance their mortgages when rates drop, so should businesses seek lower rates on their outstanding debts. As the supply of credit grows, lenders are generally more willing to consider refinancing.
The key is to calculate the real value of a refinance transaction, not only after paying the fees, but also by considering the difference between the refinance rate and the interest rates in the market. A lender might offer a no-fee refinance, but it’s not necessarily a deal if the rate is higher than what other lenders agree to. The same goes for refinance transactions that “reset the clock” on a loan, implying a longer series of repayments in the future.
Pay attention to exchange rate fluctuations. Large institutional investors move markets, and today’s institutional investors like to take advantage of international differences in interest rates. If they can borrow at 4% in Europe and earn 5% in the US, even for a short time, they will. But if rates fall faster in the United States than in Europe, some of that money could go in the opposite direction, weakening the dollar in the process.
If you are negotiating contracts with international suppliers or selling in foreign markets, these exchange rates have a direct effect on your profits. In fact, given the volatility that foreign exchange markets may bring this year, you may want to consider long-term deals that lock in rates for several months or longer.
Related: Small businesses face higher costs and interest rates. Here are 6 steps to avoid a crisis.
Use caution when taking. The job market is still tight by historical standards and the economy is growing quite rapidly. If anything, economists fear the Fed won’t lower rates fast enough to avoid a surge in unemployment. However, with inventory reductions in retail and an increase in some manufacturing sectors, as well as sustained demand for services, the situation could also heat up. After all, in the last two years the unemployment rate has been even lower than it is today for long periods.
This atmosphere of uncertainty means that businesses should pay attention to the labor market. Hiring, and sometimes even firing, involves a fixed cost that cannot be recovered. Alternatively, employers could consider using flexible workers, on a recurring basis or even on long-term contracts. When the uncertainty resolves and demand is stable, these workers will also be excellent candidates for permanent hires.
As a final note, consider your customers and suppliers. For small businesses that handle cash on a daily basis, interest rates may not seem too important. But they affect your customers’ ability to purchase your goods and services. They also determine how much rent your landlord must charge and where your insurance premium might go afterward. Once you know how these things are connected, you’ll be in a better position to prepare for the trends to come.