How the Fed's long-awaited rate cut will affect businesses — and why it's not all good news

Small businesses seeking fresh capital are likely to be big beneficiaries of the Federal Reserve’s long-anticipated announcement Wednesday that it's cutting interest rates.

The September 18 announcement by the Fed that it would lower rates by 0.5% is great news for small businesses, said Brock Blake, founder and CEO of online small-business lending marketplace Lendio.

“It feels like a sigh of relief and a loosening from lending institutions to start lending again,” Blake said in an interview. “I think it’s as much about the mindset and the optimism that is attached to it as it is the actual rate cut.”

Even before the rate cut was announced, application volume this month at Lendio was up 15%, Blake said, as many businesses anticipated the Fed would lower rates amidst a cooling labor market and slowing economy.  Business loans are not tied as closely to interest rates as mortgage rates are, but lowering the rate can drop the cost of variable-rate loans and entice business owners sitting on the sidelines to start expanding their businesses again. 

For much of the last 18 months, with interest rates high, many businesses and lenders simply “hunkered down” to wait things out, Blake said.

“People are anxious to get capital flowing again. They are anxious to be able to do be doing deals again. They want to get back to growth mode,” he said.

Rohit Arora, CEO of Biz2Credit, said small businesses with floating-rate loans will see instant relief as their rates drop.

More small-business owners also will qualify for loans, and lenders will start making more loans as their portfolios rightsize after being caught upside down during a series of Federal Reserve rate hikes across 2022. Essentially, many banks had fixed-rate portfolios locked in at lower rates that inhibited more lending as rates rose.

“Most of the traditional lenders got hit very badly in a high-interest-rate regime,” Arora said. “For them, it’s helpful. There will be more appetite for lending in the market.”

The rate cut, however, does carry a cautionary note, Arora warned. It signifies the Fed might see a weaker national economy overall and is getting more aggressive to help stem a steeper downturn. 

Arora said inflation numbers over the next month or two will provide more context for where the economy is heading and whether the Fed will have to change course to adapt.

“I think this is a bit of a gamble in my view," he said. "Let's see how it plays out."

Challenging market for small businesses

Small businesses have had to deal with a much tighter credit market in recent months. The tightening was detailed in the latest Senior Loan Officer Opinion Survey on Bank Lending Practices at the Federal Reserve. That research, spotlighting the second quarter, found that for commercial and industrial loans in particular, banks tightened their standards at a time when demand for loans was unchanged. Banks also tightened their lending standards for commercial real estate loans despite weaker demand for such loans.

According to the Federal Reserve report, lenders that tightened their business lending cited a “less favorable or more uncertain economic outlook, worsening of industry-specific problems, a reduced tolerance for risk, and increased concerns about the effects of legislative changes, supervisory actions,” and other issues.

Small-business lending marketplace Lendio similarly found that lenders increased requirements to qualify for financing in the first half of the year. 

The Federal Reserve Bank of Kansas City found that small-business lending in the first quarter of 2024 dropped 6.7% compared to the same period in 2023. That same survey of 170 banks found that credit standards had tightened for the 10th consecutive quarter.

In addition to providing new opportunities for small-business owners, Wednesday's action by the Federal Research might help mortgages start flowing more too, according to Mortgage Bankers Association Chief Economist Mike Fratantoni, who said while the rate cut has largely already been priced in, that has still meant a lot more home-purchase activity in recent weeks. 

“We do expect that if mortgage rates remain near these levels, it will support a stronger-than-typical fall housing market and suggest that next spring could see a real rebound in activity,” said Fratantoni in a statement.

But Fratantoni also highlighted some concerns, mostly that the Federal Reserve stressed that unemployment might stay higher than expected for longer than expected. 

“While not likely to be in a recession, the U.S. economy is likely in for a period of slower economic growth,” he said.

Small Business Administration seeks to fill small-business loan gaps

More small-business owners are getting access to loans backed by the Small Business Administration thanks to a wide number of reforms and program tweaks made by the agency.

The agency’s loan count to Black-owned businesses has more than doubled in the current fiscal year compared to fiscal 2020, according to agency data. It also has doubled loan values for Latino-owned businesses and women-owned businesses, the agency said.

Part of that push stems from a record number of new-business formations — about 443,000 each month, according to the Census Bureau. That’s 92% above the pre-pandemic average.

“Over the past four years, more entrepreneurs than ever before have pursued the American dream of business ownership, and the SBA has been committed to matching this incredible wave of enthusiasm with the capital, market access and resources small businesses need to start, grow and thrive,” said SBA Administrator Isabel Guzman in a statement.

Among the agency's initiative has been the launch of its Working Capital Pilot Program, which will run through July 31, 2027. The program is an extension of the SBA's prime 7(a) loan program.

The SBA also has expanded its lending efforts to boost energy-efficiency and climate-focused projects through its Green Lender Initiative, a program that targets the SBA's Community Advantage program, the mission-driven component of the agency's 7(a) program. The agency is increasing the maximum loan size available through the program to $500,000 — up from a current $350,000 cap that also requires projects to be in specific geographic areas.

The agency will be creating an application process for participating lenders to expand their geographic reach. It also will allow lenders to apply to expand their loan sizes up to $1 million — or $2 million for climate-related projects.

The SBA additionally has lifted a loan maximum in its 504 loan program for energy efficiency and renewable energy projects.