The Federal Reserve’s recent half-a-percentage-point rate cut has made a lot of people feel more optimistic about the economy — which is good for entrepreneurs. If you’re deciding whether now is the right time to start a business, Fed rate cuts might give you extra motivation to form an LLC and open a business checking account.
As part of its Sept. 18 announcement of a 0.50% rate cut, the Fed also forecast that it expects to cut rates again by the end of 2024, and then by another 1 percentage point by the end of 2025. These possible future rate cuts are not guaranteed. But if interest rates come down more in the next six to 12 months, that could provide an accelerating boost to small businesses and startups.
Let’s look at a few reasons why the Fed reducing interest rates could increase your incentives to start a business soon.
1. Lower interest rates = easier money
Looking at the big picture, when the Fed cuts interest rates, it’s trying to ease monetary policy. This means the central bank is trying to pump more cash into the economy by making it easier for banks to issue credit and making loans more affordable for borrowers.
Fed rate cuts are generally good news for the economy because there will hopefully soon be more money in circulation. Easier money might mean:
- Lower interest rates on business loans
- Lower rates on personal loans to help start a business
- Lower APRs on small business credit cards
Although it’s often hard for newly established small businesses to qualify for business loans, lower interest rates are always good news for borrowers. If you’re trying to use personal loans to start your business, such as personal credit cards, a home equity loan, or other personal credit, lower interest rates might make the calculations more attractive — and make that debt easier to repay as your business picks up steam.
Why a Business Credit Card Could Transform Your Small Business
These business credit cards that offer a convenient and efficient way to separate personal and business expenses, simplifying accounting and tax reporting.
Additionally, business cards can provide valuable perks such as rewards points, cashback, and expense tracking tools, enhancing financial management and the potential to help save money in the long run.
2. More appetite for risk from investors
As part of the overall “easy money” effect of Fed interest rate cuts, some small businesses might have an easier time raising money from investors. Whether your business needs venture capital, angel investors, or crowdfunding from everyday investors, lower interest rates might make it easier for your company to access the capital you need.
When interest rates go down, that means the best savings accounts and money market accounts are no longer paying such high APYs. If investors can earn 5.00% yield or more on their cash in a bank account, this risk-free high yield can sometimes be a disincentive to invest in stocks, startups, or other assets that are not guaranteed to succeed.
But when the Fed lowers interest rates, the best savings account APYs go down, too. And if investors can no longer earn such an attractive return on their savings just by leaving their money in cash, it tends to make investors more willing to invest in riskier assets. This can be good news for small businesses. Lower interest rates can create more sentiment in the markets of being “risk-on” — investors might be more comfortable taking a chance on your company.
3. Companies (and consumers) might be ready to spend
Another impact of low interest rates for starting a business is hard to measure, but it can be powerful. With easier money, lower borrowing costs, lower APRs on credit cards, and a heightened mood of optimism and risk tolerance, there can be a broader economic stimulus effect. After Fed rate cuts, more money might be out there for your new business idea.
Lower interest rates can motivate big companies to start spending on new equipment, facilities, and long-delayed consulting projects. This can create opportunities for business-to-business (B2B) small businesses that supply corporations with all these products and services.
Lower interest rates (such as lower mortgage rates and lower APRs on credit cards) can also spur consumers to spend more. Cheaper debt and easier money can keep consumers spending freely at your retail space, restaurant, or e-commerce store.
Bottom line
Lower interest rates are likely good news for the economy and entrepreneurs. If you’re thinking about starting a business, the Fed’s rate cuts could open up the flow of money to make it easier for entrepreneurs like you to get loans, attract investors, and make bigger sales to customers.
