The Federal Reserve’s move to cut the benchmark rate by a quarter point to 3.75% – 4.00% marks a turning point in the economic cycle. For the first time in months, policymakers are signaling that inflation has cooled enough to give borrowers some breathing room.

That’s welcome news for small businesses and community banks ready to help. But it comes with caveats and new responsibilities. Here are a few to watch:

Lower rates, brighter outlook for small businesses: When the cost of borrowing declines, it becomes easier for small businesses to invest in equipment, expand operations or smooth out cash flow. That can be especially meaningful for smaller firms that often lack the large cash reserves or diversified revenue streams of bigger corporations.

The potential downside, however, is that rate reductions often occur when economic activity is slowing. Historically, lower rates have served as a counterweight to waning confidence and cooling growth.

Fortunately, that’s not the case.

Economic activity overall is holding up, supported by solid consumer spending and continued strength in overall employment. That means that, in this current environment, moderate growth paired with lower rates should serve small businesses well.

Smaller enterprises have less of a financial buffer to weather downturns. That makes an environment like today’s economy — with modest growth, stable demand and a slightly easier cost of capital — beneficial. It also provides breathing room to manage expenses, refinance debt and make the kinds of incremental investments that sustain local economies.

How lower rates affect lending, deposits and margins: From a community banking perspective, the Fed’s rate cut will shape several key dynamics — loan demand, deposit competition and profit margins.

Loan demand is typically driven by two forces: the level of interest rates (the cost of money) and business owner confidence. While lower rates may give a slight boost to borrowing, I don’t expect a momentous change in loan demand until uncertainty around tariffs and trade policy is resolved. Right now, many businesses are taking a “wait and see” approach to major investments. They’re renewing existing credit facilities, maintaining working capital lines and making necessary maintenance capital expenditures—but significant, strategic expansions are essentially on hold.

For banks, the impact of lower rates on profitability depends heavily on each institution’s balance sheet structure. Banks that are asset-sensitive, meaning their assets reprice faster than their liabilities, tend to see margins compress when rates fall. In contrast, liability-sensitive banks, whose funding costs decline more rapidly than their loan yields, may benefit from lower rates.

Deposit competition remains intense across the industry and is unlikely to ease simply because the Fed has lowered rates. Customers are more informed and rate-conscious than ever, comparing offers online and shifting balances quickly. Community banks must therefore continue balancing the need to remain competitive with the imperative to maintain financial strength and stability.

Balancing customer needs with economic pressures: Community banks play a significant role in helping businesses and households navigate periods of economic uncertainty. Their close connection to local markets allows them to respond quickly to changing conditions and to structure loans that reflect the realities of individual borrowers and communities.

When cash flow slows, banks can often adjust loan terms or restructure facilities to help borrowers manage temporary pressures. A comprehensive review of a business’s assets, liabilities, and cash flow can sometimes identify new strategies to improve liquidity or strengthen long-term financial health.

Many institutions also emphasize proactive financial management among their customers. In times of economic growth, paying down debt or setting aside reserves can create a cushion for future downturns. Maintaining adequate liquidity and planning remain key components of financial stability, particularly for small businesses that may have less flexibility during slowdowns.

These practices illustrate the importance of collaboration between lenders and borrowers in sustaining local economic resilience. Rather than reacting to short-term challenges, successful community banking emphasizes foresight, discipline, and steady communication.

Have a balanced, long-term view: A lower-rate environment offers both opportunities and challenges for banks and their customers. Reduced borrowing costs can encourage investment and consumption, but they also compress net interest margins—the spread between what banks earn on loans and what they pay on deposits. This dynamic requires careful balance-sheet management and continued attention to risk.

Community banks must balance the needs of savers, who seek competitive deposit rates, with those of borrowers looking to capitalize on more favorable lending conditions. The broader objective is to maintain stability and sustainability across economic cycles. Strong capitalization, prudent underwriting and ongoing engagement with local customers remain fundamental to that effort.

The most resilient institutions are those that maintain a long-term perspective, recognizing that monetary policy is cyclical, but the mission of supporting local communities endures.

Looking ahead: The Fed’s latest rate cut underscores both the progress made in curbing inflation and the caution required in a slowing (but still resilient) economy.

For small businesses, lower borrowing costs represent a potential tailwind. For community banks, the focus will remain on balancing growth opportunities with prudent risk management.

As the rate environment evolves, attention will turn to how institutions sustain healthy lending activity, manage deposit competition and preserve margins. But the fundamentals of community banking — relationship lending, local expertise and disciplined financial oversight — will remain anchors through periods of change, channeling credit to small businesses and other sectors while reinforcing confidence in their communities.

Patrick Ryan is the CEO of First Bank.