Oct 15, 2024 | Accounting & Tax Planning, Blog

Falling Interest Rates and Your Small Business

The Federal Reserve has begun lowering interest rates for the first time in four years. Is it a game changer for small businesses? Is it too early to tell? Here’s what history and current research tells us.

The half-percentage reduction by the Federal Reserve in September may not seem significant to the average person. However, analysts call it an “unusually aggressive move” aimed at getting ahead of a potential recession and curbing a steady uptick in unemployment. Many anticipated a more standard quarter-point reduction (or decrease). Additional reductions are expected over the next few months.

A Small Business Survey for Q3 from CNBC and SurveyMonkey reveals that these lower interest rates will lead small business owners to increase investments, expand their business, or increase inventory. That’s because, historically, federal interest rate reductions:

Make borrowing more affordable. Interest expenses can immediately diminish on existing variable-rate loans, and refinancing options may be available for fixed-rate loans. New loans and lines of credit can be cheaper as well. This all adds to an increased ability to invest in equipment, inventory, and expansion. The remaining interest expenses can be used to calculate a limited tax deduction for business interest expenses.

Stretch spending opportunities. With lower borrowing costs, small businesses may get more for their money on capital investments like equipment and machinery, research and development, real estate, and other long-term asset purchases. As a bonus, many of these categories come with tax deduction opportunities.

Increase business value. This can affect your succession or expansion plans. Is it the time to sell? Buy? Pass the business down to the next generation? Be sure to understand how current and future interest rate cuts could affect these plans.

But do they increase hiring? The Feds are banking on it, but business owners know it’s not that simple. The survey mentioned earlier found that 38% of small business owners feel inflation is the most significant risk to their business, nearly three times higher than consumer demand and interest rates. And there’s still plenty of concern that inflation hasn’t stopped. Why does hiring stall when inflation fears loom large? It’s the risk of having to lay off newly hired employees.

As a small business owner, it’s important to consider:

Existing debt and potential refinancing options.
Opportunities to buy or borrow that may be more financially viable now.
How interest rate changes affect your future plans, including succession.
Optimizing deductions and managing any potential tax implications of growth.

Lower interest rates generally create opportunities for small businesses, but owners should carefully assess how to maximize the benefits while managing any tax implications. Feel free to contact us with questions.

Photo from 123rf.com

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