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Issues for Business to Consider Regarding Low Interest Rates

Issues for Business to Consider Regarding Low Interest Rates

The business world is facing unprecedented challenges at the moment. In fact, a book could easily be filled with all the ways the COVID-19 pandemic is impacting different industries. While the effects are widespread, certainly not all aspects of business are being impacted negatively.

One example of widespread change during this time is extraordinarily low interest rates, not just in the U.S., but across the globe. Money has been made cheap to stimulate investment and lift the economy, but this solution is not as simple as banks showering businesses with cash. It’s a complex situation, and we are going to look at five areas that small businesses must consider when interest rates are low.

Banks Aren’t Compelled to Lend

In many cases, lower interest rates mean that banks will lend money more freely; however, in those cases, underlying conditions must also be right. For example, in 2008 lower interest rates did not cause banks to lend more because there were other issues like balance sheets and liquidity. Another issue is the fact that low interest rates can raise the demand for money, but not the supply. This problem is usually solved with quantitative easing, which we are likely to see a lot of soon, but banks are still not compelled to lend.

Lending Rules Can Still Be Strict

Some steps have been made by President Trump to roll back Obama-era banking regulations, but banks will still want to see some viable evidence that your firm can pay off the loan. This requirement might be harder to meet with the current pandemic situation as it is difficult to prove that profits will bounce back. In addition, be watchful for stipulations tied to any loan agreements. The BBC recently reported that UK banks were trying to link personal liability to loans that were backed by the government.

Reorganizing Debts

At the end of 2019, Americans were carrying record levels of debt, which was news greeted with insouciance by most. Since then, circumstances have changed dramatically, and the pressure of lower interest rates should be enough to encourage businesses and individuals to reorganize debts and take advantage of market conditions. Individuals could consider cutting credit card debt by taking a secured personal loan, and businesses can take similar steps to move debt around in order to cut down on costs. Commercial interest rates will vary by lender, so you will want to shop around for the best rates for debt consolidation if you decide to take out a loan for your company. The bottom line is that you should take advantage of the current situation and explore the available options for reorganizing debt.

If Banks Don’t Lend, There Are Other Options

As part of the stimulus package set out by the US Government, the SBA (Small Business Administration) is offering loans to businesses that can’t get them from banks or elsewhere. The rates are 3.75% for small businesses, and 2.75% for non-profits, and the loans come with long-term repayment options.

On top of that, there are always new and established fintech lenders out there, but bear in mind that many fintech lenders do not react to market forces in the same way as traditional banks. Additionally, as Forbes reports, some fintech startups are at risk of going out of business during the pandemic due to their specific modelling.

Remember That All of This Is Unprecedented

The financial reactions to the Coronavirus pandemic are unprecedented, and it seems that the normal rules of engagement do not apply. This has not been like the recession of 2008, nor has it been like The Spanish Flu of 1918, so the decisions you make around your business right now, be it borrowing money to invest or for other means, must be equally unique.

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by Dirk DeBie // Contributor to Businessing Magazine.

Opinions expressed by contributors are their own.