Q: Now that the Federal Reserve
is cutting interest rates to boost the economy, how can I take advantage of this
trend to lower my cost of capital?
A: While the Fed's recent rate
cuts have been a boon to business owners and consumers alike, this is not the
time to go on a borrowing binge to build your business. Despite the liquidity
crunch caused by the subprime mortgage meltdown, the Fed must balance its desire
to stimulate the slowing U.S. economy with the risk of igniting inflation and
choking consumer demand.
That said, the Fed's recent rate cuts have created a number of opportunities
for startup entrepreneurs looking to reduce their monthly interest payments.
According to Robert Sloop, CEO of Kaizen Capital Advisors LLC and an interim CFO
who specializes in securing financing for restaurants, you may want to consider
paying off any high-interest credit card debt you took on to start your business
with a home-equity credit line that's typically tied to the lower Fed funds
rate. Another idea, Sloop says, is to apply for a credit card with a low
introductory rate and use that card to consolidate your outstanding credit card
debt. Just remember: What comes down can quickly go back up again. Resist the
temptation to pile on more debt--either on your credit cards or home equity
line--just because rates are currently low.
Originally published in the May 2008 issue of Entrepreneur magazine
Rosalind Resnick is the founder and CEO of Axxess Business Consulting, a New York consulting firm that advises startups and small businesses. She is also author of The Vest Pocket Consultant blog.