How to Take Advantage of Low Interest Rates During a Recession
Financial downturns usually mean a drop in interest rates, and the COVID-19 crisis has been no exception. Soon after the pandemic hit, the country entered a recession and interest rates plummeted. But in certain ways, the drop in rates can be seen as a silver lining, providing a way forward for companies trying to get back on their feet financially. Learning how to take advantage of low interest rates can help your business keep making progress even during a difficult situation.
Why interest rates drop
When the economy enters a recession, the demand for credit increases. Businesses and individuals facing shortfalls due to slowed sales or layoffs turn to credit cards and loans to pay their bills and other necessary expenses. However, lenders tighten their lending criteria during downturns because they're worried about taking on high-risk borrowers.
A company that's only been in business for a couple of years and lacks a great credit score or strong financial history represents a risky deal for lenders. If the business continues to struggle and can't meet its monthly payments, the bank suffers from having less income and fewer liquid cash assets. The same thinking applies to consumer lending. Lenders may not approve applicants with a fair credit score and history because they've raised the bar for qualification in the face of economic challenges.
The Federal Reserve, however, usually steps in to ease the situation. It purchases bonds, such as Treasury bonds, to provide banks with liquid cash. At that point, banks may lower the rates at which they lend money to one another and lower the rates they'll offer to borrowers. Stabilized by the Fed's intervention, banks may relax their lending criteria again and provide credit at the newly lowered interest rates.
Taking advantage of low rates
The COVID-19 recession came as a shock to business owners, but it's not the last downturn you're likely to see. Economies fluctuate, but they eventually bounce back. In the meantime, it's important to look for ways to shore up your company's finances to come through the economic crisis even stronger. The benefits of low interest rates are that they offer several opportunities for saving money and even expanding your business.
Take out a new loan
If your business was growing pre-COVID and is still operating steadily, a low-interest-rate period could be a good time to apply for a loan. You may have seen increased interest in one of your products or identified a new market segment for expansion. Maybe you need additional warehouse space to store your inventory. There are many types of business loans for expenses to explore. You may be able to secure financing at a low rate, allowing your operations to expand during the pandemic and beyond.
Refinance a loan
You may be able to save money by refinancing your current business loans to a better rate. In addition to saving money on interest, refinancing often extends your repayment terms, which means lower monthly payments. And lower monthly payments allow you to have more cash on hand for unexpected expenses.
Consolidate existing debts
If your business currently has several loans or high-interest lines of credit, you may be able to save hundreds of dollars a month by consolidating them. You can apply for a low-interest loan and use it to pay off all your other accounts. Then you'll only have to pay one debt each month, making it easier to manage your payments. You'll also have trimmed your monthly debt obligations. Importantly, you'll save the company a great deal of money in the long term because you won't be paying off high-interest cards for years to come.
Opportunity in difficult times
No one welcomes an economic downturn. But as a business owner, you're accustomed to pushing through tough times and doing what it takes to keep your company going. Knowing how to take advantage of low interest rates enables you—and your business—to become more resilient no matter what the market throws at you.
Financial insights for your business
This information is provided for educational purposes only and should not be relied on or interpreted as accounting, financial planning, investment, legal or tax advice. First Citizens Bank (or its affiliates) neither endorses nor guarantees this information, and encourages you to consult a professional for advice applicable to your specific situation.