If you're among the many business owners captivated by cheap, low-cost access to capital, you may have been caught off guard as low-cost floating-rate debt suddenly tripled in price last fall. In what is generally known as a pivot, Federal Reserve exercised her skill for it increase interest rates to cool the economy. As a result, you will want to consider what this means in terms of financing your business.

What was the pivot?

In August 2023, in response to a widespread and persistent inflationary shock, the US Federal Reserve began one of the largest rate hikes in history. The goal was to squeeze excess liquidity out of the economy, and the result was that the cost of money went through the roof.

A widespread consensus view was that the Fed would not withdraw until the economy softened significantly, meaning that 2023 was It is assumed to have a recession. This view was accompanied by the idea that only AFTER the economy was softened by the Federal Reserve start lowering rates. As entrepreneurs, this made us uncomfortable, but at least we all agreed on what was going to happen.

Then, in December 2023, another extraordinary thing happened – the pivot. In a shock to the consensus view, the Fed said it would look to cut rates in 2024. The message was nuanced, but essentially it can be analyzed this way: The US does not need to enter recession for the Fed to feel that inflation is under control. With inflation cooling month by month, the position is that it is now appropriate to “normalize” rates – not back to the lows they were, but lower than they are today.

What comes next?

For many observers, no recession and a quick turnaround have painted a picture of a “soft landing,” with few job losses and inflation under control. As this picture begins to emerge, what does it mean for an entrepreneur trying to finance her business?

Based on our experience, here are four tactics in 2024 that are relevant now:

1. Grade rates down

The direction of the charges is heading down. When it's unclear, many thought it could be as early as spring 2024, and the consensus is pointing to summer. How much will the fees be reduced? This is uncertain as many had been betting that the key borrowing rate could fall as low as 1.25% in 2024, with people now thinking it is closer to a 0.75% drop. When and how big the premium reduction will be will depend in part on inflation and the economy in general.

Barring any major exogenous shock, rates could fall in 2024. As such, it makes sense to issue credit and participate in the downside. Many rates not directly related to Fed funds have already started to fall; Mortgage rates, for example, are already in the high 6% range, down from seven lows.

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2. Invest in your banking relationship

The extraordinary regulatory change has meant that banks' hands are increasingly tied in how they treat customers. The good news is that this has removed some of the bias BANKING industry; The bad news is that banks are slow to make exceptions. However, most people do business with people and your bank is no different.

For more than a year, smaller banks have been under pressure after big rate hikes sent many of the bonds they held down in value. The decline of Silicon Valley Bank and challenges in commercial real estate continue to put banks on the defensive, and as such, banks will be limited in who they can lend to.

You want your bank to understand your business and your plan, and the more time you give your banker to hang out with their committee and wade through their red tape, the higher the probability that your loan will be approved on time and at the appropriate rate. There will be fewer bank loans in 2024, so make sure yours is one of them by over-communicating and anticipating what your banker might need to approve your loan.

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3. Look at sources of private capital

While traditional banks have withdrawn from lending, private capital has rushed to fill the gap. Some have called this period the “golden age of private credit”, Without many of the restrictions that a regulated bank might have, private lenders are generally more expensive but more flexible. Terms for private loans vary widely, but can be anywhere from 3-7% more expensive than a bank loan. However, private lenders can often offer you a longer repayment period. Brokers add fees and expenses within this space, while Business Development Companies (BDCs) invest outside of a dedicated fund structure. For this reason, we prefer to work with private lenders and their BDCs.

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4. Diversify your credit sources

Credit is like oxygen; it's pretty boring until it goes away. While keeping up with customers and employees is difficult enough, most entrepreneurs want their lending to be as simple as possible. But we are in very unstable times, between changes in rates and the lending environment. “Beetle” means that lenders behave differently, and as we saw with Silicon Valley Bank, some may disappear entirely. In 2024, entrepreneurs must have one diversity of providersif it's possible.

Given how weak consensus has been in predicting the future, it likely makes sense to have a variety of rate structures. A possible best-case scenario might look like this: both a private lender and a bank, some variable and some fixed rates. Although more expensive and complicated, this structure can provide an insurance policy against what is sure to be an interesting year.