Summary: 2020 could be your year to take a financial risk with low-interest rates holding steady for the foreseeable future.
I discuss regularly about whether the time is right for a business to obtain a loan, but one thing not mentioned often is how the overall business environment impacts that decision.
Although desperate or reckless entrepreneurs sometimes turn to internet loans with exorbitant interest rates and onerous terms, 2020 is shaping up to be a good year to secure a loan– assuming your company is in a strong financial position.
At the Federal Reserve’s last 2019 meeting a few weeks ago, it left borrowing costs unchanged and indicated that it plans to keep rates steady throughout 2020.
That’s good news for you, if you’re looking to expand. 2020 is an excellent time to do it.
Loans aren’t going to get a whole lot cheaper than they are right now: You likely can line up a 10-year loan from the federal Small Business Administration with an interest rate of 7.5 percent. Who wouldn’t enjoy terms like that?
Also, if your balance sheet is clean, now may be the time to refinance existing loans. Even if you’re extending the length of your loans, the lower payments may give you much more significant cash flow to handle everyday needs.
Remember that recessions or events that spur economic downturns aren’t always predictable even if the signs were evident in hindsight. So, don’t think you have plenty of time, again assuming your company is in a strong position.
Plus, there’s another benefit to this timing: When interest rates are low, everyone theoretically has more money, including your customers. That means that not only are they more likely to buy from you, but they’re more likely to pay you back promptly. In turn, you can use that added cash to your benefit, whether it is to bolster reserves, pay off your own debt, or something else.
All this said, I can’t say that everything is perfect. Low- interest rates aren’t entirely favorable, although the good certainly outweighs the bad.
But a negative side effect can include higher insurance premiums. Because insurers won’t be making as much on their investment, they may increase rates to make up the difference.
Overall economic activity may slow as retirees reduce their spending because the amount of interest income, they receive declines.
Meantime, banks may eventually reduce lending because the lower interest doesn’t make it worthwhile for them to take so many risks. Thus, some of your customers might eventually not be able to buy from you if they face a funding squeeze.
There’s even the possibility of a so-called liquidity trap when instead of spurring economic growth, low-interest rates reduce the money flow as investments are made into assets that don’t foster higher employment.
Of course, there’s no guarantee any of these things happen, but they are something to keep in the back of your mind as you try to take advantage of interest rates that almost assuredly won’t be this low forever.