With rate cuts likely, businesses must now prepare to borrow

Five things business borrowers should have ready when applying for a loan

“It’s time for politics to adjust.” – Jerome Powell, Chairman of the Federal Reserve

Federal Reserve Chairman Jerome Powell has indicated that the central bank plans to take steps to avoid weakening the labor market, a strong signal that interest rates may be cut soon.

“We do not seek or welcome further cooling in labor market conditions,” Powell said in a speech at the Fed’s annual meeting in Jackson Hole, Wyoming, on Friday, August 23. “It’s time for politics to adjust.”

The fix is ​​now really likely to come at the next Federal Open Market Committee (FOMC) policy meeting (September 17-18, 2024). It would be very surprising at this point if the Fed did not cut its key federal funds rate.

This is good news for small business owners for two reasons. The first is that inflation has been easing, although it is not yet at the Federal Reserve’s target of two percent. Rising labor, inventory and fuel costs have reduced the profits of small business owners – especially those who were reluctant to raise prices during inflationary periods to make up the difference.

The second reason is that post-pandemic high interest rates caused many small business owners to put off borrowing for working capital, equipment replacement or expansion. As the Labor Department adjusts previously overstated employment numbers and the economy adjusts to layoff announcements from corporations like GM, which announced earlier this week it will cut more than 1,000 software services jobs.

For more than a decade, starting right after the stock market crash of 2008, interest rates were close to zero. Eventually, they began to climb, but held steady during the dark days of the COVID pandemic. However, in 2022, the Fed began a series of rate hikes in an effort to curb rising inflation.

Although rates stopped rising and have been steady, speculation has grown that a rate cut could be in the works. Many expected this to happen at the last FOMC meeting in late July. Since then, unemployment numbers have risen and inflation has fallen, although it remains above the Fed’s target rate of two percent.

So now, we know that the Fed Chair is likely to announce a rate cut in mid-September at the next FOMC meeting because inflation is easing. This answers the who, what, when, where and why.

The big question remains how much?

Currently, the Federal Funds Rate is in the range of 5.25% – 5.5%. At this point, will a 0.25% drop be enough to make an impact or will the Fed decide to cut it further?

“The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook and the balance of risks,” Powell said.

What business owners should prepare before submitting a loan application

There is more to applying for business funding than just filling out an application. Banks and other lenders call for the submission of certain documentation to complete the application process.

The digitization of the lending process has made it easier than ever to apply for a business loan. They can be submitted with just a click of the mouse and uploaded to the lender’s online loan submission platform. Here is a list of what most borrowers look for.

1. Business plan:

A professionally written business plan defines what the business is and provides a roadmap for where it wants to go. Elements include an Executive Summary (a concise overview of the company, including its mission, product/service offerings, and goals). The plan should also provide a market analysis that defines your target audience, competitors and market trends and a Sales/Marketing Strategy that explains how you plan to attract and retain customers. Importantly, the plan should include detailed revenue, profit and cash flow projections for the next 3-5 years. After all, a lender’s main concern is whether a borrower will have the money needed to repay the loan.

2. Financial documents:

· Bank statement from the last 6-12 months to demonstrate cash flow and financial stability.

· Profit and loss statement (your income, expenses and profits over a period of time).

· Balance sheet: assets, liabilities and owner’s equity.

· Tax records

3. Credit report

Banks usually ask for your personal credit score. Be sure to review your credit report for any errors before applying for a loan. If your business has a credit history, be sure to address any discrepancies.

4. Legal Documents

Lenders will often want to know the business structure of the firm (LLC, corporation or S-Corp). You may be asked to provide your company’s Articles of Incorporation. Other legal documents that are often required are contracts, leases and professional licenses.

5. Lender Requirements

Each lender has its own requirements for the specific documentation it needs to process the loan.

Have all the required documents ready when you submit your loan application to help ensure a smooth process. Having all of these documents that a lender requires will likely improve your chances of being approved for a business loan.