The Fed Lowered Interest Rates Again: The Takeaway

The Federal Reserve cut interest rates by a quarter point today. This is its third consecutive rate reduction. The Federal Reserve (often called “the Fed”) is tasked with monitoring the economy. The Fed is considering the employment rate and inflation as they made this decision. When the Fed lowers interest rates, they are attempting to stimulate growth. The Fed’s lower rate indicates a slowdown of inflation. In addition, the rate is designed to boost hiring. 

Clearly, the Fed is concerned about the persistent inflation concerns. The Fed also indicated that they do not know if they will be able to achieve their goal of a 2% inflation rate for the foreseeable future. Finally and significantly, this was a split decision, an indication that we are probably approaching the end of lowering rates.

A lower interest rate brings certain advantages, including:

• Loans will now be cheaper. The cost to borrow money will now be cheaper by about .25%. That adds up! 
• Demands for new loans will now increase. So your project needs to show strength to lenders to move you to the front of the queue. 
• Now is a very good time to consider a refinance, especially for high interest loans. 
• Fixed versus variable interest rates. Rates probably will not go down further (by much) in the short term. It might be better to lock in rates now. 
• Lower rates don’t make everything perfect. A distressed property is still a distressed property and will still be difficult to finance. 

How do interest rates impact your current and future loans?

Whether you’re a seasoned investor or business owner, understanding the mechanics of interest rates is critical. Only then can you make informed decisions.

Let’s break it down.

Cost to borrow money:

• A loan’s interest rate determines how much it costs to borrow money. The interest rate determines the additional amount you pay on top of the principal.
• Lower rates reduce your borrowing costs. As a result, your cash flow and profitability improve.

Value and growth of investments:

• On the flip side, interest rates dictate the returns on investments. These include bonds, treasury bills, savings accounts and certificates of deposit (CD’s). Higher interest rates can mean better yields for investors.
• Compounded interest rates accelerate the growth of these investments over time.
• It is critical to compare returns against inflation. If inflation outpaces interest rates, your purchasing power diminishes.

Key Factors to Know about Interest Rates:

•Not every loan is dependent on the Fed rate or the prime rate. While many loans are influenced by Federal Reserve policies, others are pegged to different benchmarks. These include the SOFR (Secured Overnight Financing Right), swap rates or even lender-specific indices.

The prime rate is often used as a baseline for commercial lines, with an additional margin based on borrower risk. (Prime +1.5 for example).

• Fixed vs. Variable Rates

• Fixed rate loans lock in your interest rate for a part of the life of the loan. This provides stability, but can be less advantageous if market rates drop significantly.
• Variable rates fluctuate with market conditions and are often readjusted quarterly. While they offer savings during low-rate environments, they can become costly when rates rise.

Navigating the complexities of financing in today’s fluctuating rate environment can be challenging. But that’s where we come in.

Be realistic about business expenses. Simply put, if you are contemplating a purchase of a new business or refinancing a maturing note, you need to know how much a loan will cost you. Fortunately, our GRP Capital team can help you look at options. We will examine possible loan terms, so you can know the nuts and bolts. What will the monthly payment be? Is that a reasonable price to pay?

Variables to Consider about all Loans:

• Interest Rate: What is the rate and is it fixed or variable? Be sure to understand how your lender calculates a variable interest rate. Is there a floor or a ceiling?

• Prepayment Penalties: Many loans have a prepayment penalty if you exit the loan quickly. If you are looking at a loan for a short term, be sure you consider this aspect. It may not make sense to exit a loan when you consider the penalty. 

If you would like to discuss loan options or any other business plans, feel free to contact our team.  We can conduct a business evaluation, reach out to our lenders, offer advice on bidding and secure financing for you. An initial business evaluation is complimentary. 

We specialize in matching client with lenders who understand their unique projects.

• Our expertise spans acquisitions, refinancing and construction financing across various industries.
• We prioritize solutions that balance competitive terms with sufficient cash flow for long-term success.

Whether you are looking to refinance existing debt or secure funding for growth opportunities, our GRP Capital team is here to guide you every step of the way. Let’s discuss how we can help you achieve your business goals.