Small business strategy: Taking advantage of lower interest rates

The federal reserve will lower interest rates, ending a three-year strategy to stamp out inflation. During that time, I’ve seen startups turn to zombies as they failed to raise VC funding, growth stumble as digital marketing turned upside-down, and small businesses struggle to pass price increases onto customers. I’ve also seen dozens of our clients seize the opportunity a high-interest environment creates to differentiate their products, focus on their core, and deepen their competitive moats.

Now that the high-interest era appears to be over, how will you pivot your business strategy to meet the shifting opportunities and threats? Let’s discuss the most critical initiatives you should consider this fall as the cost of capital drops.

Lower interest rates punishes savers with diminishing returns and higher inflation. Now a great time to reconsider your company’s cash strategy. If you are lucky enough to have excess cash, there are many great ways to get rid of it:

Remember that each action has income tax consequences, so consult your CPA or fractional CFO to determine your best action.

Economists project a unique intersection between cheaper capital and a favorable economic outlook. That makes the next 12 months ideal for investing in small business growth. Growth strategy should always consider your industry’s trends, competitive posture, and available resources. But, in general, you can consider the following three proven growth strategies:

If your gross margins are strong and operations have more capacity, then growing existing product lines may be your best return on investment. Whenever you invest more money in sales and marketing, keep an eye on your Customer Acquisition Cost (CAC) by channel to avoid wasting money on inefficient tactics.

If your market is growing and business cash flow is strong, now is a great time to pursue product innovation. Minor improvements to existing products are the least expensive way to build competitive moats. For example, integrating AI into products and services is the most common innovation we expect in the next 12 months.

Avoid making long bets on major breakthroughs—they are highly likely to fail. If you do want to make a major product change, consider acquiring a proven technology through M&A (see below).

Several forms of M&A can grow your business and make you more competitive—expanding geography, acquiring new verticals, increasing size and capital access, etc. The best acquisitions create revenue synergies, such as cross-selling and upselling. This usually comes from acquiring a different product or service that complements yours.

Alternatively, you may consider the ever-popular roll-up strategy, in which a PE investor merges several competitors to boost their size and reduce their overall risk. This is a fun, fast-growing strategy if your business is the platform executing the acquisitions.

If your sales demand is strong, you should expand operations to match. However, tactical operations investments differ from the strategic efficiency investments I recommended for the soft landing.

During a bear market or capital crunch, sales growth is challenging, and cash flow is king. Therefore, investing in operational efficiency is an excellent idea for any business that can afford it.

On the other hand, in a growth market such as the one economists are predicting today, you must weigh efficiency investments against growth opportunities such as increasing market share or innovating your product. In most cases, the top-line opportunity outweighs any pure efficiency investment.

Instead, tactically pursue operations investments that expand bottlenecks AND improve efficiency. This two-for-one approach will facilitate top-line growth and bottom-line expansion. You can qualify such investments by performing an ROI analysis.

A strong economic outlook and cheap capital mean more startups are targeting your customer base. To avoid unpleasant surprises from new competitors, stay connected with your industry, customers, and competitors. Your industry intel, paired with R&D investments, will ensure you maintain or grow your market share.

Although dropping interest rates is a landmark change in monetary policy, you should not confuse this with a black swan event like COVID-19. We are at an inflection point, but change will be slower and more measured. So, too, should your business change. Ensure you measure the progress of your investments with clear metrics and be prepared to abandon initiatives that do not yield fruit.

Collaboration with your management team and CFO are crucial in both the planning and execution of these strategies. Teamwork will ensure accountability to your goals and avoid wasting money.