Could Fed interest rate cuts make it easier to start a business? 3 reasons

The Federal Reserve’s recent half-percentage-point cut in interest rates has many people feeling 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 interest rate cuts may give you extra incentive to form an LLC and open a business checking account.

As part of its September 18 announcement of a 0.50% interest rate cut, the Fed also forecast that it expects to cut rates again by the end of 2024 and then another 1 percentage point by the end of 2025. These possible future rate cuts are not guaranteed. . However, if interest rates fall further over the next six to twelve months, it could provide a faster boost to small businesses and startups.

Let’s look at some reasons why the Fed lowering interest rates could increase your incentive to start a business quickly.

1. Lower interest rates = easier money

Looking at the big picture, the Fed is lowering interest rates in an attempt 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 lend and making loans more affordable for borrowers.

Fed interest rate cuts are generally good news for the economy because hopefully there will be more money in circulation soon. Easier money can mean:

• Lower interest rates on loans for companies
• Lower interest rates on personal loans to help you start a business
• Lower APR on small business credit cards

Although it is often difficult for start-up 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 a business, such as personal credit cards, a home equity loan or another personal loan, lower interest rates can make the calculations more attractive – and make the debt easier to pay off as the business takes off pace.

2. Greater investor appetite for risk

As part of the overall “easy money” effect of the Fed’s interest rate cuts, it may be easier for some small businesses to raise money from investors. Whether your company needs venture capital, angel investors, or crowdfunding from grassroots investors, lower interest rates can make it easier for your company to access the capital it needs.

When interest rates fall, that means prime savings and money market accounts no longer pay as high APRs. If investors can earn 5.00% or more on their cash in a bank account, this risk-free high rate of return can sometimes discourage investing in stocks, startups or other assets that have no guarantee of success.

But when the Fed lowers interest rates, the APR on prime savings accounts also declines. And if investors can no longer earn such an attractive return on their savings by simply leaving their money in cash, it makes investors more willing to invest in riskier assets. This could be good news for small businesses. Lower interest rates can create a greater risk-on mood in the markets – investors may be more willing to take a risk on your company.

3. Businesses (and consumers) may be ready to spend

Another impact of low interest rates on starting a business is difficult to measure, but it can be powerful. Easier money, lower borrowing costs, lower APRs on credit cards and a heightened mood of optimism and risk tolerance could have a broader economic stimulus effect. After the Fed cuts interest rates, there may be more money available for your new business idea.

Lower interest rates could motivate large companies to start spending on new equipment, facilities and long-delayed consulting projects. This could create opportunities for small business-to-business (B2B) companies that provide all these products and services to corporations.

Lower interest rates (such as lower mortgage rates and lower APRs on credit cards) may also encourage consumers to spend more. Cheaper debt and easier money can make consumers feel free to spend money in your retail space, restaurant or online store.

Conclusion

Lower interest rates are probably good news for the economy and entrepreneurs. If you’re thinking about starting a business, Fed interest rate cuts could open up the flow of money to make it easier for entrepreneurs like you to obtain loans, attract investors, and increase sales to customers.