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Big Banks See Businesses Adapting to High Interest Rates

FINANCE: Borrowing Growing Slowly as Fed Maintains Fight Against Inflation

The chance of seeing a cut in the Federal Reserve’s benchmark interest rate in 2024 is dwindling. In March, economists, analysts and the Fed were contemplating three cuts this year that would have put the federal-funds rate target at around 4.6%. However, following its June 12 meeting, the Fed has cut those expectations down to just one rate cut with a target of 5.1% – or no cuts at all for the year due to persistent, sticky inflation.

Despite the letdown of not seeing relief in borrowing costs, financial institutions are reporting that optimism remains strong among businesses as they adapt to a new normal of higher borrowing costs.

Adam Kheder
SVP, Small Business San Diego
Bank of America

“While the business community is certainly eager for more rate cuts, they have grown accustomed to the current rate environment and feel prepared to navigate the overall economy,” said Adam Kheder, senior vice president of small business for Bank of America, San Diego. “San Diego entrepreneurs remain cautiously optimistic even with the upcoming presidential election that typically comes with some expected volatility. While business owners remain mindful of the impacts of inflation and interest rates on their bottom lines, both concerns have lessened since Spring 2023.”

That optimism is reflected in a May report by the Bank of America Institute that showed 87% of mid-sized business owners and 65% of small business owners surveyed expect revenue increases over the next 12 months.

The BofA report did show that while business owners were mostly optimistic about their own businesses, they were divided about their outlook on the national economy depending on size: 75% of mid-size business owners expect the economy to improve, while only 33% of small business owners felt the same.

Those numbers align with a J.P. Morgan survey conducted at the beginning of the year that showed 62% of business leaders were optimistic about their company’s performance in 2024, with 55% reporting they expect an increase in revenue.

Notably, the J.P. Morgan report showed that business leaders in California were more pessimistic in their outlook for their local economy than the national average, with 33% pessimistic in the state compared to 20% nationally.

Chris Amble
Managing Director & Market Executive San Diego
Wells Fargo Bank

Chris Amble, managing director and market executive at Wells Fargo Commercial Banking in San Diego, pointed out that expectations of both recession on one end and rate cuts on the other have now contributed to business owners’ mix of pessimism about the economy and optimism for their own ability to navigate it.

“Many business owners nationwide held their collective breath throughout 2023, anticipating the crash of the economy’s much-discussed ‘hard landing.’ Except, it never happened,” he said. “As 2024 began, hope for a ‘soft landing’ emerged, and a rosy outlook blossomed. And according to the seers of all things Fed-related, 2024 was certain to produce a bumper crop of interest rate cuts – three of them. Except, those too have not materialized yet.

“Then in March, the U.S. Bureau of Labor Statistics released Consumer Price Index (CPI) data, pinning inflation at 3.5%. That led the Fed to yellow-flag interest rates and reduce the expected number of 2024 rate cuts to one,” he continued. “While economic optimism has not faded entirely, the reality that a higher interest rate environment might be the new ‘business as usual’ is gaining currency.”

Overcoming Vexing Concerns

According to the J.P. Morgan report, only 36% of small and mid-size businesses surveyed cited rising interest rates as a major challenge, far behind other vexing concerns such as labor issues (54%), economic uncertainty (47%) and revenue growth (39%).

John Simmons
Head, Middle Market Banking & Specialized Industries
JPMorgan Chase Commercial Banking

“Today’s business leaders are not strangers to the challenges before them, and have remained nimble and primed for opportunities despite continued uncertainty,” said John Simmons, head of Middle Market Banking and Specialized Industries at JPMorgan Chase Commercial Banking. “The most resilient leaders focus on continuous improvement, iterating with each challenge to make strategic investments in their operations, adopt new technologies and focus on their people to move their business forward.”

Bank of America’s Kheder chalks up the lesser concern about interest rates to businesses’ ability to adapt to uncertain economic climates and utilize technologies to streamline operations.

“Interest rates impact the cost of borrowing and credit in terms of the percentage a small business pays plus the amount of their minimum payments toward that debt. High interest rates may disproportionately impact businesses, for example, that purchase products on terms that come with fees and interest,” he said. “However, the good news is that many San Diego small businesses are growing despite the current rate environment. They have figured out how to work around rate costs by reducing bottom line and margin expenses through efficiencies and technology, but they also continue to borrow.”

Amble, who pointed out that in his 27 years as a commercial banker, he “has watched the ups and downs of interest rates,” said his advice to businesses is to “make a pit stop” at the mid-year to “consider what good business practices and strategies are for the remaining laps of the year.

“Also, pause to think about what better practices and strategies could be, and what best practices might look like,” he said. “While it is good to be aware of your economic environment and better to add efficiency/technology investments at the same time, it is best to execute both of those practices while also forming a team of trusted advisors to help identify strategic growth opportunities.”

Amble added that as business owners adapt to a new normal of a federal funds rate in the 5.25% to 5.5% range, “many are reevaluating what ‘good’ business results for the year could look like.”

He suggested business owners include in their strategies developing and maintaining a team of advisors that include a lawyer, accountant and banker.

“This counsel will help provide insight, review efficiencies, and advocate for regular stress-testing to help you deploy the correct tactics to meet company objectives, despite economic variables,” he said. “Yet, as important as advisors are in curating long-term planning, it is also important to remember that even their roles as advisors require regular review. Business owners’ needs are constantly changing, so it is critical these relationships either evolve to meet company needs or be reconsidered. Being conscientious of the limitations of certain relationships is part of growth.”

Kheder also pointed out the importance of businesses maintaining a close relationship with their banks.

“Through these times, our San Diego bankers serve as trusted advisors to our clients in addition to being traditional money lenders,” he said. “We develop an expert understanding of their business and their industries so that we can best advise them on things ranging from how adopting tech and automation can streamline operations and costs, to navigating the complexities of cross-border business and understanding market volatility.

Demand, Need for Borrowing Persists

Despite the interest rate remining higher than expected this year, borrowing by small businesses in San Diego continues as business owners “become accustomed to the current rate environment and how to work around associated costs,” Kheder said, adding that demand for new credit and lending continues from Bank of America’s small business clients, and the bank continues to see “quarter-over-quarter lending growth in San Diego.”

“We see more businesses accessing capital to grow and expand as well as to give themselves a cushion in anticipation of any unforeseen market volatility,” he said. “Local small businesses are also taking advantage of business tax incentives to upgrade their equipment as well as creating strategic alliances or partnering with an investor or another company to acquire new office and warehouse space.”

Kheder also pointed to the lessons in resilience small businesses learned while surviving the pandemic, learning to be “wise” about spending and money management. Despite businesses’ “more cautious” outlook, BofA’s San Diego business clients are still growing.

“We see notable expansion of commercial real estate and equipment leasing, for example, by health, medical and veterinary businesses and in manufacturing and wholesale,” Kheder said. “Demand also remains strong for professional services such as CPAs, attorneys and engineering-related firms.”

Wells Fargo’s Amble said that while considering borrowing capital or making investments in their businesses that can reduce costs and improve efficiency, business owners need to be aware of economic impacts to their business, but even more aware of their industry’s environment.

“Businesses hesitate to commit to new processes — from machine learning to e-commerce — because of the up-front investment. While being careful is wise, it’s equally important to acknowledge the opportunity cost of foregoing innovation,” he said.

Amble cited a 2023 survey of 906 automation executives in North America and Europe conducted by Bain & Company that showed the growth and revenue gap between companies that chose to invest heavily in automation versus those who chose not to “has, and will continue, to widen.”

“In addition to creating expansion and development opportunities, investment in treasury automation, which decreases the use of paper instruments, can further reduce fraud risk,” he said, adding that fraud has skyrocketed 385% since the pandemic, according to U.S. Department of Treasury. “Infusing treasury management services with the latest technology may not only improve efficiency but could also reduce accounts receivables hiccups and payment delays.”

 

 

 

 

 

 

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