3 Reasons You Don’t Want to Wait to Get Business Financing
We’re all aware that the Federal Reserve is meeting in September to discuss the possibility of an interest rate cut.
Because of this, many small business owners are considering waiting out on their financing needs in the meantime. While that may be a good idea for some, the wait-it-out strategy may cause more harm than good for others.
In this article, we hear from Michael Gaura, Elevate Funding’s Director of Financial Planning & Analysis, regarding some considerations to make before deciding to wait for interest rate cuts:
1. The newly-cut interest rates will not go into effect immediately for some financial products.
“The Fed only has three opportunities to cut from now until the end of 2024 — the September, November, and December Fed meetings,” Michael said. The federal funds rate doesn’t directly control what interest rate the banks charge, but does influence how much banks can charge each other when lending or borrowing excess reserves overnight. Banks will then adjust the rate they charge for short-term loans, such as credit cards, new home equity loans and lines of credit. Fixed-rate mortgages don’t mirror the federal funds rate, they track the 10-year Treasury yield, so it should take longer to experience reductions. If you are waiting it out, it’s best to ensure that you have a firm understanding of the different financial products and their turnaround times as well, and if you are in dire need of funds to continue operating, this strategy likely isn’t a great choice for your business.
2. Some business financing options aren’t intrinsically linked to the Fed the way traditional banking products are.
According to Michael, “Traditional interest rate-based banking products, such as mortgages and credit cards, will be most dramatically impacted by Fed cuts as they are priced using interest rates, while Revenue-Based Financing is not a loan product, and is not priced using interest rates. Revenue-Based Financing payback is fixed based on a merchant’s assigned risk profile by the lender and a fixed percentage of the merchant’s expected revenue.” This means the Fed has less bearing on your payback amount with alternative financing methods, so there is no real incentive to wait it out — your rate will likely be very similar today to what it was last year and what it will be one year from now.
And Michael believes there’s an added economic benefit of going the alternative financing route. “Revenue-Based Financing lenders bear the risk of economic downturn, versus traditional lenders that pass that risk on to the merchant.”
3. Interest rate cuts will only be marginal for short-term financing products.
“Even if the merchant is in the market for an interest rate product, the Fed is looking to make very small incremental cuts over the coming years. If a merchant is looking for short-term financing less than 12 months, the incremental Fed cuts will have marginal impact vs longer term interest-based financing products like a 30-year mortgage,” Michael said.
At this time (August 22, 2024), it seems that the September meeting is favoring a 0.25% rate cut. For a shorter-term product, this difference would have a minimal impact on most businesses’ finances.
If you are interested in Revenue-Based Financing or simply want to learn more about what our funding process entails, we would love to hear from you! Just shoot us a quick note on our contact form, and one of our in-house customer service team members will get back to you as soon as possible.
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