3 reasons why small businesses must borrow today’s interest rates

The president of the Federal Reserve, Jerome Powell, announced on Wednesday, May 7 that the Central Bank Federal Open Market Committee (FOMC) unanimously decided to maintain the reference federal funds rate at 4 ¼ to 4 ½ percent. Therefore, interest rates will not decrease, as President Trump has been asking.

The Fed continues to evaluate the impact of tariffs on inflation, which is an important factor considered when establishing interest rates. Although President Trump has promoted lower rates since he assumed office on January 20, the Fomc The officials are waiting to see how much the tariffs so discussed and anticipated by Trump will push the highest inflation.

FOMC seeks to achieve its dual objectives of maximum employment and inflation at a long -term 2% rate. When considering the scope and time of the adjustments to the current objective range for the federal funds rate, the Committee examines the incoming data, the evolutionary perspective and the balance of risk.

“Rate increases announced so far have been significantly larger than expected. However, all these policies are still evolving and their effects on the economy are still very uncertain,” President Powell said at his press conference in Washington, DC, after the FOMC decision. “As economic conditions evolve, we will continue to determine the appropriate position of monetary policy based on incoming data, perspective and risk balance. If the great increases in the tariffs that have been announced are sustained, they are likely to generate an increase in inflation, a deceleration in economic growth and an increase in tax lack.”

Powell said the effects on inflation could be of short duration, which reflects a unique change in the price level. However, he warned that it is also possible that inflationary effects may be more persistent. He said that avoiding this result will depend on the size of the effects of tariffs, how long it takes them to completely go to prices and, ultimately, to maintain well -term inflation expectations well anchored.

Related: What Trump’s rates will mean for small businesses

In a moment of economic uncertainty and signs of inflationary pressures, it is unlikely that the Fed changes its monetary policy in the short term. The Committee decided to maintain the objective range for the federal fund rate. The reduction of rates could cause inflation to increase even more, so until the impact of rates is known, the Central Bank can keep the fees as they are. FOMC evaluations will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

“It seems that the economy is growing at a solid pace. The labor market seems to be solid. Inflation is working a little above 2%, so it is an economy that has been resistant and is in good shape,” said President Powell. “We do not believe that we should be in a hurry. We believe that we can be patient, observe the data. We believe that we are in a good position in which we must let things evolve and clarify in terms of what the response of monetary policy should be.

Should companies borrow money from today’s interest rates?

Many factors determine whether the owner of a business must request money borrowed or not. The interest rate is an important factor, but in many cases, it is not the most important.

For example, if a business opportunity arises in which loan money will help to finance the expansion of production capacity, a new product line, the purchase of inventory at an attractive price or the acquisition of a competitor, it is a good time to borrow.

Related: Four reasons why high interest rates harm small businesses

Some companies that deal with foreign manufacturing products and parts may have requested money to buy items from countries before tariffs are completed. Or they may have found headquarters based in different countries from China, which is subject to the highest rates (145%). In doing so, companies could mitigate the pain of transmitting the cost of tariffs to customers who are possibly becoming more sensitive to prices.

Manufacturing companies that experience a breakdown of vital machinery for production capabilities or loss of a vehicle required for distribution may have no choice but to ask for money to fix or replace your equipment. If this is the case, loans are advisable to avoid interrupting operations.

Naturally, companies with regular positive cash flow, low debt use and low debt / income rates will have more capacity to borrow, even relatively higher interest rates, than companies that have financial difficulties. It is important to keep in mind that interest rates close to zero available in much of the 2010 and immediately after the Covid pandemic hit in 2020 will never happen again. Any person sitting and waiting for an interest rate of 1 or 2% can wait a long time.

What companies should not ask for money right now?

If your company has a poor cash flow and/or a credit rating less than star, now it is not time to borrow. If you can obtain funds, you can have a high capital cost since lenders assume an additional risk when lending it to you.

If you have difficulty paying your current debts, it makes little sense to assume more obligations, unless you have the opportunity to refinance existing obligations at a lower rate.

If your business is solid but anticipates a slowdown later in the year, loans may not be advisable at this time. On the other hand, now it may be time to concentrate on looking for cost savings by finding new products, negotiating better terms with suppliers or reducing workers’ hours (because it will probably be difficult or illegal to reduce payment rates).

Companies should consider loans to today’s rates:

1. The expected return on investment exceeds the cost of capital.
2. The business owner is confident that the company is in a financial position strong enough to pay the debt.
3. If there is an economic advantage or a crucial commercial reason to borrow now, instead of waiting.

President Powell said the economy is “in a good place” and that the FOMC “will wait and see” how the economy works before the Federal Reserve will consider reducing interest rates again. Business owners may also want to wait and see the approach before taking out a Loan for small businesses.