Will recent Fed interest rate cuts affect small business lending?

The Federal Reserve reduced interest rates on Wednesday, September 18. This move, which lowered rates by a quarter of a percentage point, is the second since late July. The Fed has hinted it is ready to do it again if the US economy shows further signs of lagging. Based on economic forecasts from the Fed’s two-day meeting, it is expected that we might see at least one more cut this year. Rate cuts in the short term can keep credit flowing. It serves to boost business and consumer spending as uncertainty rises.

This decision is good news for most business owners. It will boost investment spending. Lower rates also make it more affordable for small business owners and others to obtain money. The decrease in interest rates is, as might be expected, a symptom of some weakening in the economy. Thus, bankers and Credit Union execs may not be as excited by the news as business owners.

How Does the Federal Reserve Affect Small Businesses?

The Fed uses its interest rate policy to ensure that the US economy continues to grow. It also manipulates rates to promote high employment and keep prices stable. It must thus manage the amount of money in circulation. Low rates make capital less expensive and increase the money supply. The customers of small businesses can also borrow money for less. As a result, they can buy more products.

Still, the Fed’s decision to reduce interest rates can have a net negative effect. Entrepreneurs may feel the pinch in the short term. It’s not attractive for banks and Credit Unions to remain in the small business lending pool. If they do take this cue to exit the market, small businesses may have to rely on alternative lenders. Their rates tend to be higher. The interest rate cut may thus prove to be counterintuitive.

How Does Interest Rate Affect Small Business?

We have seen how interest rates affect banks’ and Credit Unions’ willingness to lend. Still, the falling interest rates may be a good thing. Credit Unions are looking for ways to expand. Some are considering partnering with the Small Business Administration on loans. Small businesses do not usually consider Credit Unions as a first option when in need of capital. They also tend to pass over them when they need other financial services. The rate cut can present an opportunity for Credit Unions to enter this lucrative market.

What Happens When the Fed Cuts Interest Rates?

Small business owners will have fewer barriers. With money available at lower rates, they will enjoy even more flexibility in the way of capital. Business owners now have all the tools, conditions, and interest percentages they need to grow. Funding from Credit Unions can help them realize growth through many avenues. For example, they can hire new workers, expand their businesses, and more. Small business loans are more accessible than ever, and the Fed rate cut is only making it more accessible.

It’s easy to see the benefits of cutting interest rates. However, there are also costs, especially when the Fed keeps rates low for an extended period. For example, there is the risk of high inflation as demand for goods increases. Low-interest rates also penalize savers and those who rely on interest income. It’s a good thing for Credit Unions to take advantage of the low rates and draw in more customers in the short term. However, we need to do what we can to ensure the health of the economy, so that the low rates won’t be necessary for too long.