Is now a good time to take out a loan for my business?

With the Fed’s decision last week to drop interest rates, we’ve been getting a lot of questions about debt. Top of the list: “Is now a good time to take out a business loan or secure a new line of credit?” 

Sure, if you’re going to take out a loan, it’s always good news when interest rates are lower. But that’s only a tiny piece of the puzzle.

Here are fundamentals to take into consideration:

• What are your big-picture goals? Before we set a long-term forecast with our clients, we establish parameters: What kind of business do you want to have? Are you planning to grow and scale? Is your debt collateralized by an asset, or are you taking on a personal guarantee to secure the note? What’s your exit plan?

Strategic debt will be a big part of these conversations. If taking on debt adds additional stress to your business (because, for example, it requires you boost sales quickly to make the monthly payments), that’s okay if it’s part of a master plan. If it’s just a ‘nice-to-have,’ you might want to rethink the impact it will have on your team, before signing on the dotted line.

• What do your day-to-day and week-to-week operations look like? Are you making your payroll and satisfying your AP within terms, all while building up a healthy cash reserve? When we do the short-term forecast, we’re looking for businesses' vital signs. Securing – and relying on – a line of credit can be one way to bridge small gaps in cash flow, but it shouldn’t be a band-aid to staunch a more serious bleed.

Be honest with yourself around why you need to draw on a line of credit. Every business should have one, but it’s important not to use it to hide bigger problems – even if interest rates are down.

• Are you ready to apply for a loan? To get the best terms, you need to present yourself in the best possible light. Clean financials that show steady cash flow will make a significant difference when it comes to securing the lowest possible interest rate. If you don’t have clean books or still need to finalize tax filings for the prior year, get those outstanding items in order now before approaching a bank.

The Fed has signaled their commitment to ensuring that their recent fight against inflation doesn’t lead to a weakening job market, so most analysts are anticipating 7 additional rate cuts between now and mid-2026, totaling a 2% reduction from today’s rates. These cuts would move us back to the Fed’s long-term sustainable rate goals that were set before COVID and will hopefully make the 2020-24 spike look more like a blip on the radar.

That’s good news for people with variable rate debt, as we should be at the highwater mark right now barring any unforeseen setbacks on the inflation front. There is a lag between the Fed’s interest rates and consumer debt, but we’re expecting the market to start pricing in lower rates over time.

On the flip side, if you have investments and can afford to keep that money on the bench and lock in higher interest rates through CDs or other financial instruments, now would be a good time to have those conversations. 

But regardless of whether you’re looking to build a (bigger) cash reserve, take on (more) debt, or both, there's one constant for every business owner: Use data to get where you want to go.

A good forecast is a great place to start a conversation about making a major change to your capital structure. Debt can be emotional, but those emotions don’t have to guide your decision-making process if you have a well-tested, data-driven forecast that your CFO can use to help you plan for the future. 

While nothing is guaranteed and even the best planned forecast is going to be different from reality, when you can look at best- and worst-case scenarios, it’s easier to visualize the potential upside and risk. With those parameters in place, the decision to secure a loan or line of credit becomes much more straightforward.

If you'd like to learn more about how we guide our clients towards profitability and growth, talk with one of our virtual CFOs in a free consultation.