The Fed might cut interest rates soon. That’s weighing on business owners’ plans.
The Fed might cut interest rates soon. That’s weighing on business owners’ plans.
One of the big economic questions of this new year is whether and when the Federal Reserve will start cutting interest rates. Although several members of the Fed’s rate-setting committee expect it to cut more than once, the central bank’s decisions will depend on what actually happens in the economy.
That uncertainty poses a conundrum for business owners who are thinking about borrowing money: Do they wait for the Fed to move so they end up paying less interest? Or do they borrow what they need now?
One sector that’s particularly sensitive to high interest rates is housing construction — especially since construction projects require borrowed money.
“All of our construction loans for projects that we’re building typically are floating-rate debt,” said John Kirk, a multifamily developer based in San Antonio. “So as interest rates rise, it puts more pressure on the budgets of the projects.”
Kirk said interest payments are so high that a lot of construction projects don’t make economic sense. In some cases, Kirk said, developers can’t even get loans.
“There are projects that are either paused or shelved for the immediate future until you have more certainty, more clarity in the marketplace,” Kirk said.
But now that interest rates are widely believed to be at their peak, Kirk said the apartment construction slowdown is probably as bad as it will get. So, he decided to leave the big firm he works for to start his own development company. As soon as rates start coming down, Kirk can pull the trigger and start borrowing.
“In the next 12 to 24 months, I think you’re going to see a rising market,” he said. “And I felt like for me, for my career decision, jumping in at that time is the right move.”
In some cases, deciding whether to borrow now or wait for rates to fall comes down to how much revenue a company is pulling in.
“The name of the game right now is cash flow, cash flow, cash flow,” said Barbara Richardson, the owner of SpringWell Financial Solutions, an accounting firm in the Atlanta area that works with retailers, restaurants and other small businesses.
Richardson said many of her clients are doing well and pulling in a lot of cash. She said she’s advising them to hold off on borrowing until interest rates fall.
“Maybe we do want to update a very significant piece of equipment, but maybe we don’t have to,” Richardson said. “Then, in those cases, we might suggest, ‘Hold on to your cash, conserve cash, wait.’”
But Richardson said other businesses might want to go ahead and borrow right away. In some cases because a loan can provide a safety net if cash flow is down. In other cases because they’re looking at opportunities that are too good to pass up.
For instance, one of her clients just found a great location to expand into, and they had to act quickly or miss out. Richardson said it makes sense for that client to borrow now, since the new location could bring in more revenue down the road.
“Even if interest rates are not where you want them to be right now, maybe you’re paying a couple hundred bucks more than you want to but the opportunity is worth it, we go with the opportunity,” Richardson said.
Another business in that situation is Mavericks Manufacturing Partners, a company in Escondido, California, that does advanced welding and metal fabrication for the aerospace and defense industries. Owner Chris Blench said there’s a lot of opportunity in those sectors.
“The phone’s been ringing off the hook for us to quote jobs,” Blench said.
That’s in large part because the defense sector always has a lot of money to spend.
“In our space, all this money has already been appropriated through the defense budget,” Blench said. “This is why we established our business, to service these particular customers.”
But to do that, Blench’s company needs a lot of new equipment. He recently bought a heavy-duty welding table, and he’s in the market for an automated laser welding setup that’ll cost him roughly $120,000. A 3D printer he wants to purchase could cost $500,000.
All of those purchases require loans. But even though interest rates are high right now, Blench said he’s going to buy the gear.
“It’s not slowing us down in any way,” Blench said. “It’s not causing us to not make an investment because the cost of money is a little bit higher.”
That’s because Blench needs this equipment to meet customer demand. Waiting around for rates to fall could cost him sales.
“That means I can’t offer my customers that service or capability for that amount of time, just so I can save a few bucks,” Blench said. “We just have to make the move.”
And since demand for his services is so high, Blench said he can simply pass along the cost of higher interest rates to his customers.
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