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What the Rate Slash Means for Your Business Loans

March 20, 2020

The Fed Just Slashed Rates: What You Need to KnowFeds cuts rates due to COVID-19

After leaking out of China earlier this year, the COVID-19 virus has only been increasing around the world.

With almost 10,000 deaths to date and 165 countries infected, it’s no surprise that nearly every world government has begun taking measures to protect its citizens from this aggressive illness.

Italy, France, and other countries in Europe have initiated not just travel bans, but strict curfews and quarantines for their citizens as well. In America, major universities are closing their doors and ejecting students from student housing. Millions of businesses have temporarily shuttered themselves from the public.

Interestingly, the virus itself is not the only danger that we are facing. We also have to contend with the new global economic slowdown that comes with the reaction to the virus. The stock market, which until recently was on a historically strong bull run, just had years of progress erased within a few weeks.

Most states are seeing weekly unemployment benefits claims increased by a factor of five to ten compared to a couple of weeks ago. Some are even higher than that. 18% of families are reporting a member of their household being laid off or having their hours reduced as a direct result of the virus. In all of this, one thing is clear: Things are going to get worse before they get better.

 

The Good News: People Are Trying to Fix ItThe Federal Reserve is attempting the economy by cutting rates.

While scientists all over the world work tirelessly to isolate, test, and distribute a vaccine for the novel coronavirus, governments are scrambling to fight off the dramatic economic effects that this could have on the global economy.

In an effort to boost economic growth and reduce the cost of credit for businesses, the federal reserve just cut their interest rate (the rate at which banks borrow from each other) to near zero for the first time since the 2008 financial crisis. The effect that this will have on your business is tentative and depends on your exposure to debt. Let’s walk through some of that now.

 

How the Rate Cut Will Affect Business LoansHow the Rate Cut Will Affect Business Loans

On the surface, a rate slash sounds like a dream come true for a business that uses loans. Since the banks can borrow from each other more easily, they can maintain their minimum reserve amount even at high amounts of lending. Additionally, they don’t need to charge high rates on those loans, since any rate above zero will make them money.

But longer-term, a slashed rate can be a bad thing for business.

Since banks no longer make the same dollar amount they used to for the same amount of loan, their profits start to decline. Soon, as the number of loans they can justify issuing plummets, they tighten up restrictions for who gets a loan and who doesn’t.

This concept is compounded by the reason the Fed cuts rates in the first place: recession.

Because incomes are down and unemployment is high, the overall risk of issuing a loan skyrockets. This further cuts down the profitability of even the most practical loans. In the worst of it, many businesses would be lucky to get any loan at all.

 

More Good News: There Are Other OptionsInvoice factoring is a great financing solution for small businesses.

In times like this, there can be a shortage of hope and optimism, particularly when it comes to business and finance. It’s essential to be cautious and consider the worst-case scenario, but don’t forget that things could always be worse and that there are people available to help.

One thing you might consider for your business during this uncertain time is invoice factoring. Invoice factoring is the sale of your current accounts receivable for instant cash.

Basically, you sell your business’s open invoices to a factoring company for an immediate cash advance. Factoring puts money in your account right away without the red tape and lengthy time it takes for a bank loan. Plus, there’s no debt created, so there’s no money to pay back.

The key difference between invoice factoring and loans, in this context, is the type of financial entity that issues them. With a loan, you have to rely on banks, which are subject to far more debt exposure than an invoice factoring firm like TCI Capital. Because invoice factoring has nothing to do with debt, we can continue issuing instant cash to your business regardless of economic shifts.

Best of all, our rates change with the banks as well. That means that when bank loans are cheap but hard to find, invoice factoring is inexpensive, and setting up an account is fast.

The world is undoubtedly changing. On the other side of this pandemic, things will be different. The financial world will have to adapt. New technologies will make working a remote life easier.

Businesses will have to contend with tighter margins. It’s essential, as a business owner, to keep your head on straight and remain calm.

Remember, taking on debt is not your only option, nor should it be. TCI Capital is here to help. To get started, try out our invoice factoring calculator or contact us to see how much cash you can get in advance. Stay safe and stay positive!

 

 
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