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If you’re one of the many entrepreneurs who rely on cheap, low-cost access to capital, you may have been surprised when the price of cheap floating-rate debt suddenly tripled last fall. In a widely acknowledged turning point, the Federal Reserve used its ability to raise interest rates to cool the economy. Therefore, you should consider what this means for the financing of your business.
What was the pivotal point?
In August 2023, the Federal Reserve began one of the steepest interest rate hikes in history in response to a widespread and persistent inflation shock. The goal was to drain excess liquidity from the economy, causing the cost of money to skyrocket.
A widespread consensus view was that the Fed would not ease until the economy weakened significantly, meaning that would be in 2023 allegedly have a recession. This view was accompanied by the idea that only after If the economy had weakened, the Federal Reserve would begin cutting interest rates. As business owners, this made us uncomfortable, but at least we all agreed on what was going to happen.
Then, in December 2023, another extraordinary thing happened – the pivot. To shock the consensus, the Fed said it would cut interest rates in 2024. The message was nuanced, but can essentially be interpreted as follows: The US is not doing this need to go into recession so that the Fed feels like inflation is under control. With inflation cooling month after month, it is now appropriate to “normalize” interest rates – not back to the low levels they were at, but lower than they are today.
What’s next?
For many observers, the lack of a recession and a quick turnaround have painted a picture of a “soft landing” with few job losses and inflation coming under control. As this picture begins to emerge, the question arises: What does it mean for a female entrepreneur trying to finance her business?
Based on our experience, here are four tactics in 2024 that matter now:
1. Float interest rates are falling
Interest rates are trending downwards. Since this is unclear, many assume that this could happen as early as spring 2024 and the consensus points to the summer. How much will interest rates fall? This is uncertain as many had bet that the key interest rate could fall by up to 1.25% in 2024, while now people expect it to fall by almost 0.75%. When this happens and how deep the rate cut will be depends in part on inflation and the overall economy.
Barring a major exogenous shock, interest rates could fall in 2024. Therefore, it makes sense to release credit and participate in the downward direction. Many interest rates that are not directly tied to Fed funds have already begun to decline; Mortgage interest rates, for example, are already in the high 6% range, down from the low 7% range.
Related: How to Fund Your Business Through Banks and Credit Unions
2. Invest in your banking relationship
Huge regulatory changes have increasingly left banks’ hands tied in the way they treat their customers. The good news is that this has removed some of the biases in the banking sector; The bad news is that banks are slow to make exceptions. Still, most people do business with people, and your bank is no different.
Smaller banks have been under pressure for more than a year after a sharp rise in interest rates caused many of the bonds they held to lose value. The collapse of Silicon Valley Bank and the challenges in commercial real estate continue to force banks on the defensive, limiting their ability to lend to whom.
You want your bank to understand your business and your plan, and the more lead time you can give your banker to get in touch with her committee and deal with the bureaucracy, the higher the likelihood that your loan will be received on time and on time correct interest rate is approved. There will be fewer bank loans in 2024. So make sure your bank loan is one of these loans too by over-communicating and anticipating what your banker might need to approve your loan.
Related: The difference between a business loan and a line of credit
3. Look for private sources of capital
As traditional banks have retreated from lending, private equity is looking to fill the void. Some refer to this period as the “golden age of personal credit.” Free from many of the restrictions that a regulated bank may have, private lenders are generally more expensive but more flexible. The conditions for personal loans vary greatly, but can be between 3 and 7% more expensive than a bank loan. However, private lenders can often give you a longer payback. Brokers charge fees and costs in this area, while business development companies (BDCs) invest through a special fund structure. For this reason, we prefer to work with private lenders and their BDCs.
Related: 6 Steps for Your Small Business to Avoid a Financial Crisis
4. Diversify your credit sources
Credit is like oxygen; It’s pretty boring until it goes away. While keeping up with customers and employees is difficult enough, most business owners want to make their lending process as easy as possible. But we are in very volatile times, between interest rate changes and the credit environment. The “pivot” means lenders are behaving differently, and as we saw with Silicon Valley Bank, some of these could disappear altogether. In 2024, entrepreneurs should have a variety of providers if possible.
Considering how poor the consensus is at predicting the future, it probably makes sense to have different tariff structures. A possible best-case scenario might look like this: Both a private and bank lender, some with variable interest rates and some with fixed interest rates. While this structure is more expensive and complicated, it could provide a hedge for what is sure to be an interesting year.