Low Interest Rates - Growth Financing?


Written by CMG News Contributor, Doug Carleton

The Federal Reserve recently changed its policy regarding inflation because inflation has been too low to meet their goals. As a result, it will become less concerned about inflation and more accommodating toward keeping interest rates low in order to help the economy. As a result, interest rates are expected (as of right now) to stay low for several years.

Opportunity for small businesses

Low interest rates present a golden opportunity for business borrowers. Companies that might be thinking about adding new or replacing old equipment can now potentially finance it at a low rate compared to previously. So low that current cash flow could meet the debt payments needed to satisfy a bank. Also, the low interest rates are pushing commercial real estate loan rates to a level where it might be feasible to add to or buy a larger building to accommodate growth.

Banks are loaded with cash

A recent headline in the Wall Street Journal was “Banks Have Lots of Cash, Little to Do With It.” You might say to a banker “Boy, do I have a deal for you.” Maybe not quite that way, but conveying the same message. Banks have been seeing more deposits than ever because of people and companies piling up cash because of the pandemic. On the one hand, because of the problems in the economy banks are setting aside much larger amounts of cash to cover potential loan defaults. On the other hand, they are still sitting on massive amounts of cash even after the setasides. And even though their lending margins – the difference between what banks make on loans and what they pay out on deposits – are the lowest since the FDIC began keeping records in 1984, they still need to make loans.

Now is the time for planning.

Small business owners often do not address the need for financing until it arises, and sometimes that is too late. If a company is planning to grow, it should always be planning for the possibility of needing financing. Also, all lenders are not the same. Some lenders will finance certain types of assets, others won’t touch them. Some lenders (very few) will finance startups; most will not. So if you’re thinking that this may be a time to consider financing for whatever purpose, it is absolutely critical that your financials are up to date, that you can explain them to a lender if necessary, but most important, that you understand your cash flows and can make realistic projections of what you expect them to do over the next twelve months. If the banker looks at them and sees that there isn’t enough to cover the payments on the loan requested, you probably won’t get it. A really good opportunity is here because of the incredibly low interest rates, so if you’re thinking about borrowing, get ready.

This blog entry is a slightly edited excerpt from Doug Carleton's 'The Daily Life Of A Small Business Owner' series. Doug was a mentor with SCORE, Startup Virginia, and Lighthouse Labs, and has 25+ years of experience in small business finance including 12 years in SBA lending. To contact Doug directly, please email him at sbaloanspecialist@comcast.net.

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