5 Factors Businesses Should Consider Before Borrowing at Current Rates

The consumer price index published on Wednesday June 12 indicates that consumer prices increased by 3.3% compared to last May. This figure is lower than most economists expected and is generally considered a positive sign. The announcement came hours before Federal Reserve Chairman Jerome Powell announced that the central bank would keep interest rates where they are this month.

The inflation rate is the percentage increase in the price of a basket of goods and services purchased in the United States over a year. Inflation is one of the measures used by the Federal Open Market Committee of the Federal Reserve to assess the health of the economy and determine interest rates.

During his news conference, Powell said Fed officials will still “need more positive data to bolster our confidence” that inflation is heading toward the 2% target rate before the FOMC don’t lower rates.

_{Recent indicators suggest that economic activity has continued to grow at a sustained pace. Job creation remained strong and the unemployment rate remained low. Inflation has eased over the past year but remains high. In recent months, modest progress has been made toward the Committee’s 2 percent inflation target.. – FOMC statement, June 12, 2024.}

Thus, the target range for the federal funds rate remains between 5 1/4 and 5 1/2 percent. In considering any adjustment to the federal funds rate target range, the Committee will carefully evaluate incoming data, the evolving outlook, and the balance of risks. The FOMC will not reduce the target range until it is certain that inflation is moving sustainably towards 2%.

Powell called progress on inflation “modest” and indicated the Fed could cut rates once this year.

Should a small business borrow money now?

Deciding whether or not a small business should borrow money right now depends on several factors:

1. Current interest rates. When rates are low, borrowing to finance working capital or expansion is an easier decision than when rates are high. The interest rate for an SBA loan depends on several factors, including the type of loan, the amount borrowed, and the repayment terms. Currently, the interest rate for an SBA 7(a) variable rate loan is between 13.5% and 16.5%, while SBA 7(a) fixed rate loans are between 11.5 % and 15.0%, according to Bankrate.com. Additionally, Bankrate reports rates from non-bank lenders: invoice factoring Factoring fees range from 0.5% to 4%, while the merchant cash advance factor rate is 1.04 to 1.32.

2. Current economic environment. The U.S. economy as a whole is currently stable, but that doesn’t mean all local economies are doing well. If your local is thriving, it’s a good bet to borrow now. If the local economy is struggling, consider waiting.

3. Cash flow. Determine whether your business has stable, predictable cash flow to cover loan payments. Borrowings must not compromise daily operations.

4. Opportunity costs. If you need to borrow to replace equipment, expand a current space, or open a new location, evaluate whether potential growth opportunities can generate a return greater than the cost of repaying the loan. If business is booming and good growth opportunities present themselves, it would seem wise to borrow, even if borrowing rates remain high.

5. Debt levels. If you are currently in a lot of debt, consider putting off taking on additional debt. If taking out a new loan brings your debt to a level that will put a strain on your finances, consider postponing borrowing until your financial situation is stronger.

Borrowing money to grow is an important strategic decision for any business owner. Interest rates are a factor to consider, but they are not the only determining factor. Consider the opportunity costs of not borrowing and receiving a cash injection. Are you going to miss a golden opportunity just because interest rates are higher today than they were in the 2010s?

It’s essential to weigh the costs and benefits, consider the economic environment, and assess whether your business is in a strong financial position to take on additional debt. With the Fed not promising the multiple rate cuts in 2024 that people were hoping for, it’s important to determine the impact of a small business loan at current interest rates on the financial health of your business.