Business Owners Cautiously Optimistic After Rate Cut

How will last week’s interest rate cut likely influence founders’ plans to grow their businesses? Two new polls indicate that many entrepreneurs viewed the Federal Reserve’s widely expected reduction as a catalyst for reviving investment projects they delayed while borrowing costs remained high. Most owners, however, said they’ll keep waiting for additional proof that inflation won’t take off again—and push rates back up—before borrowing to finance expansion.

That cautious optimism was the main finding in polls by CNBC/SurveyMonkey and executive coaching company Vistage that sounded out over 2,000 small business owners. Both questioned participants just days before the Fed announced its half-percentage point decrease in the prime rate last week. Overall, respondents were pleased at the prospect of falling borrowing costs, and were eager to take advantage of cheaper financing to grow their companies. But after three years of punishing inflation, many said they still want to be sure prices don’t start rising again before committing to loans.

That came across clearly in CNBC/SurveyMonkey’s “Small Business Survey for Q3,” conducted between September 3-9. In it, 22 percent of entrepreneurs said they expected the Fed’s then-looming rate cut to have a major impact on their companies, with 41 percent believing the effects of that initial reduction would be minor. 

Despite those differing views, 40 percent of respondents said they’d take advantage of lowered interest rates to renew investing in their business. Just over 25 percent said that would involve increasing inventories as a hedge against a potential reprise of inflation. Another 37 percent said lower borrowing costs will allow them expand, with an additional 37 percent saying they’ll use cheaper credit to hire more employees, or strengthen salaries and benefits for existing staff.

Vistage’s main question was based more on what at the time of the study was the still unknown size of the Fed’s cut. As such, the poll asked how big of a decrease would be required for respondents to resume borrowing to finance their business growth. 

Sixteen percent set that interest reduction threshold at a quarter-point, with 23 percent citing what turned out to be the Fed’s actual half-point cut. Just over 60 percent, however, said they’d need to see levels dip by a full point—or even two—before they’d begin borrowing again. Average short-term loan rates for businesses in August stood at ​​9.5 percent, compared to 4.1 percent in July 2020 before the Fed began hiking levels.

Another question from the Vistage poll focused on how long small business owners thought any Fed interest rate cut would take to be felt by companies like their own—either in generally, or in shaping their decision to grow through borrowing. About 23 percent said it would take less than three months to register, 28 percent figuring it would be three to six months, and 23 percent saying it would be closer to a year.

Why the cautious hesitation despite the satisfaction economists and stock market investors voiced at the Fed’s cut last week? Because fears about renewed inflation remain high, causing many small business owners to question whether interest rates will keep dropping in the near term, or head back higher.

While a third of all respondents to the CNBC/SurveyMonkey polls said they thought inflation had already peaked—up from 24 percent in the previous quarterly study—66 percent believe it will continue rising. As a result, nearly 40 percent cited the potential for further price hikes as the biggest threat to their businesses, compared to just 13 percent wary of slackening consumer demand, and 10 percent worried about interest rates.

“The quarterly snapshot of Main Street businesses reveals a mixed bag of cautious optimism alongside lingering concerns about inflation and rising costs,” SurveyMonkey CEO Eric Johnson wrote on CNBC. “With a divisive presidential election on the horizon, the uncertainty is palpable.”

While it did record an overall small business confidence level of 51 out of 100 points–up four percent from the previous quarter, and nine percent compared to Q3 2023–that first net positive reading under the Biden presidency may not help Democrats much. Indeed, company owners voiced the same deep political divisions evident among the wider electorate–including in their views on which candidate’s proposals on taxes, regulation, and the economy will help or hinder their businesses most.