After two years of borrowing at painful levels, money is meaningfully cheaper again. On September 17, 2025, the Bank of Canada lowered its policy rate to 2.5 per cent — its first cut since March, and a long way down from the 5 per cent peak of 2023. For BC owners who shelved expansion plans, deferred equipment, or sat on growth because the financing maths did not work, the obvious question is whether the door has reopened. The honest answer: lower rates improve the case for investment, but they do not make a bad investment good. The discipline now is to separate projects that finally clear the hurdle from projects that only feel affordable because the monthly payment shrank.
A rate cut is not a signal to borrow. It is a signal to re-run the numbers on decisions you may have parked when capital was expensive — and to act on the ones that now generate a return above their cost.
Why the cut changes the calculation
When the Bank of Canada cut to 2.5 per cent, the major banks lowered their prime rate to 4.45 per cent. For a typical BC business borrowing on a variable basis at prime plus a margin, the all-in cost of a new loan has fallen by roughly 250 basis points from the peak. On a $500,000 facility, that difference is on the order of $12,000 a year in interest — money that previously went to the lender and now stays in the business or improves a project's return.
The context matters too. The cut came as the labour market softened and inflation became more contained — the Bank's stated rationale for moving at this meeting. The Bank signalled that rates were approaching the right level rather than promising a long series of cuts. So this is not a "rates are heading to zero, load up on debt" moment. It is a normalized, lower-cost environment in which sound projects are easier to justify and marginal ones are still marginal.
The only question that matters: does the return beat the cost?
Every financing decision reduces to one comparison. Does the return on the investment exceed the cost of the capital used to fund it? Lower rates lower the right-hand side of that inequality, which lets more projects qualify — but the left-hand side, the return, is where the real risk lives.
Be honest about both sides:
- Cost of capital is not just the loan's interest rate. It includes fees, the risk that variable rates move, and the opportunity cost of any equity or cash you commit.
- Return should be the incremental, after-tax cash flow the investment actually produces — new contribution margin from added capacity, labour saved by automation, revenue from a new location — net of the costs to run it.
A project that returns 9 per cent on capital costing 6 per cent creates value. A project that returns 5 per cent on the same capital destroys it, no matter how comfortable the monthly payment feels.
A worked example: the equipment decision revisited
Consider Okanagan Precision Welding Ltd., a fictional but realistic BC fabrication shop that shelved a $300,000 automated cutting cell in 2023 because financing then cost about 8.5 per cent and the numbers were too tight.
Scenario A — the 2023 case, at 8.5%. The machine was expected to add roughly $58,000 a year in incremental contribution margin (added throughput net of operating cost). Annual financing cost on the $300,000 over five years was high enough that, after interest and the labour still required, the project's return barely exceeded its cost of capital. The owner reasonably passed.
Scenario B — the same machine, at 6% in late 2025. Nothing about the machine changed, but the financing now costs about 6 per cent. Lower interest improves annual cash flow by roughly $7,500 versus the 2023 case. The same $58,000 of incremental margin now clears the lower hurdle comfortably — the project returns well above its cost of capital, with a payback inside about five years.
The lesson is precise: the rate cut did not make the project worthwhile on its own. It moved a genuinely productive investment from "just below the line" to "clearly above it." Projects that were far below the line in 2023 are still below it now.
What to fund first as rates ease
Not all borrowing is equal. In a lower-rate window, prioritize in roughly this order:
- Refinance expensive legacy debt. If you took on financing at peak rates, refinancing into today's lower cost is often the highest-certainty return available — guaranteed savings with no operational risk.
- Capacity that is already constrained. Equipment or space that relieves a genuine bottleneck tends to have the most defensible return because the demand already exists.
- Productivity and automation. Investments that permanently lower unit cost compound over time and are partly shielded by available expensing incentives.
- Speculative expansion. New locations or new markets can be excellent, but they carry the most uncertainty; fund these only when the return clears the hurdle with margin to spare for error.
Fixed or variable: how to fund the project
Once a project clears the hurdle, the next decision is how to finance it, and the lower-rate environment changes that answer too. Variable-rate borrowing now sits near the bottom of its range, which makes it tempting for everything — but the right structure depends on the asset, not just today's rate. For a long-lived asset such as building improvements or a major machine, matching the financing term to the asset's economic life and locking a fixed rate can be worth a small premium over variable, because it removes uncertainty from a commitment you will carry for years. For short-cycle needs — inventory, a seasonal working-capital swing, a bridge until a receivable lands — variable-rate operating credit is usually the cheaper and more flexible fit, since you can repay it quickly when the cash arrives. A useful rule of thumb: finance long assets with long, predictable money, and short needs with short, flexible money. Mismatching the two — funding a five-year machine on a demand operating line, or parking permanent working capital on an expensive term loan — is a more common and more costly error than choosing the wrong headline rate. Talk to your lender about both options before committing; the difference between a well-structured facility and a convenient one compounds over the life of the loan.
A caution on variable-rate debt
Borrowing at 2.5 per cent is attractive, but most operating lines are variable. The Bank signalled it was near the right level, which cuts both ways — the next move could be a hold or, eventually, an increase. For any financing you will carry for several years, stress-test the project against a rate one to two points higher than today's. If it still clears, you have a robust decision. If it only works at exactly today's rate, you are betting on the Bank of Canada rather than on your business.
Key takeaways
- The September 2025 cut to 2.5 per cent lowered all-in borrowing costs by roughly 250 basis points from the peak, materially improving the case for previously shelved projects.
- A financing decision is sound only when the investment's incremental after-tax return exceeds its full cost of capital — lower rates widen the field but do not rescue weak projects.
- Prioritize refinancing expensive debt and relieving real bottlenecks before funding speculative expansion.
- Stress-test multi-year borrowing against a rate one to two points higher; a project that only works at exactly 2.5 per cent is a bet on rates, not on the business.
Cheaper money rewards good judgment and punishes the lack of it more efficiently — the rate fell, but the discipline of demanding a real return must not.
If you are reassessing capital projects or refinancing in this lower-rate environment, RN Canada's advisory practice helps BC owners build the ROI and cost-of-capital analysis — and fractional CFO oversight — behind confident financing decisions. We would be glad to talk it through.