Falling interest rates may spell opportunity for business borrowers

On Dec.10, the Federal Reserve announced a cut of 25 basis points (0.25%), bringing the target Federal Funds range to 3.5% to 3.75% and marking the third rate cut this year.

The decision came after much debate among Federal Open Market Committee (FOMC) members, as they struggled with conflicting issues of a cooling labor market (which typically prompts a rate cut) and sticky inflation (which suggests rates should hold steady, if not increase). The uncertainty was exacerbated by a lack of economic data caused by the six-week government shutdown that ended last month.

Ultimately, the committee chose to focus on addressing the issue of rising unemployment by returning the Federal Funds rate closer to neutral, the point at which monetary policy is neither stimulating nor restricting the economy.

Brian Henderson, BOK Financial® chief investment officer, said he anticipates another rate cut early next year before leveling off.

"El mercado laboral has weakened and it's not likely to improve for a while. Even after this December cut, borrowing costs still remain relatively high," he said.

Henderson also noted the Fed's related move to end its quantitative tightening (QT) program as of Dec. 1, signaling a shift toward expanding its balance sheet and injecting liquidity into the banking system. Increased liquidity encourages lending and investment, bolstering economic growth.

“This also helps stabilize the Secured Overnight Financing Rate (SOFR), which creates more predictability for borrowers with floating rate debt,” he explained.

While a single, minor drop in interest rates isn’t usually an overnight game-changer, the continuing cycle of declining rates and a borrower-friendly environment could prompt businesses to reconsider certain financial strategies.

Moving money around

In response to the falling-rate environment, business leaders are revisiting their capital structures, said Paul Johnson, corporate banking manager at BOK Financial. "There are opportunities today that didn't exist a year ago," he noted.

Refinancing higher-interest debt is a big one, he said.

"Companies that took on a lot of debt around the interest rate peak back in 2023, for example, may be at a severe disadvantage compared to competitors," he explained. "Highly leveraged companies, especially, can benefit greatly from even a small rate reduction."

A lower-rate environment also helps companies improve their working capital and liquidity, as the cost of borrowing becomes cheaper.

“We’re already seeing an increase in utilization on lines of credit, and that should continue as rates drop further,” said Johnson.

At the same time, he explained, falling rates mean that companies earn a lower return on their cash deposits. This may provide the impetus for business leaders to strategically redeploy some of those funds toward other goals, such as pulling forward capital expenditures or pursuing acquisitions.

Spurring new growth

While there are many other drivers in play, a lower-rate environment might give an extra boost to industries that are capital intensive and highly sensitive to borrowing costs.

Few meet that description better than commercial real estate. Henderson said he expects to see an uptick in new construction and transactions, especially in the multifamily housing segment, as the latest rate cut could be just what developers and investors need to clear complex financing hurdles.

Similar challenges have existed in the healthcare sector, where, despite escalating demand, construction of facilities has languished due to high costs and regulatory uncertainties.

“With the tidal wave of aging baby boomers, we’re talking about a doubling of demand for healthcare services and facilities over the next five to 10 years, and no one is prepared,” said Jeffrey Covington, BOK Financial director of healthcare research and data analytics. "We're already expecting a ramp up in construction starts and transactions, and this could be accelerated as lower interest rates make projects more achievable."

Across other industries requiring major investments in technology, research and development (R&D), heavy equipment or infrastructure, lower rates promise to increase return on investment (ROI) and reveal new paths toward growth and expansion.

“It’s a good time to talk to your banker about the possibilities,” said Johnson.