When the Bank of Canada raised its policy rate to 5 per cent in mid-2023, a great many BC owners quietly shelved projects — the equipment upgrade, the second location, the refinancing — because the arithmetic no longer worked at those borrowing costs. The rate is now 2.75 per cent, cut on March 12, 2025. The projects you shelved at 5 per cent deserve a fresh look, because the number that killed them has moved by 225 basis points. The discipline now is not to celebrate cheaper money, but to re-run the math honestly against a genuinely changed cost of capital.
What changed, and why it matters
On March 12, 2025, the Bank of Canada reduced its target for the overnight rate by another 25 basis points to 2.75 per cent — the latest in a sequence of cuts from the 5 per cent cycle peak. Notably, the Bank made the cut while flagging a "new crisis" from escalating US tariffs, which it expects to weigh on growth even as it complicates the inflation picture. So this is not an unambiguous "all clear." It is cheaper financing arriving alongside genuine trade-driven demand and cost uncertainty.
For an owner, that combination is the whole story. The cost of borrowing has fallen materially, but the environment you are borrowing into is less predictable. Both facts belong in your capital decisions.
How much does 225 basis points actually change?
Owners often underweight how much a rate move shifts real costs, so let me anchor it. On a $1,000,000 variable-rate term loan, the difference between borrowing at a prime tied to a 5 per cent policy rate and one tied to 2.75 per cent is roughly $22,500 per year in interest — about $1,875 a month of pure cash that now stays in the business. Over a five-year amortization, that is well into six figures of cumulative interest. That freed cash flow is exactly what makes a previously marginal project viable again.
Three financing moves to reconsider now
The rate reset reopens decisions that were closed at the peak. Walk through them deliberately.
- Refinance debt locked in during the high-rate window. If you fixed a loan or signed financing in 2023–2024 at peak rates, model the cost of refinancing against the savings. Watch for prepayment penalties — they can erase the benefit on a short remaining term, but rarely on a long one.
- Revisit the variable-versus-fixed decision. With rates having fallen and the path ahead uncertain, the choice between locking in a fixed rate now and riding variable is a real judgment call. Variable has rewarded borrowers through the cuts; fixed buys certainty if you believe the easing is near its end or trade shocks could reverse it. There is no universally right answer — there is a right answer for your balance sheet and your risk tolerance.
- Reactivate shelved capital projects — at the new hurdle rate. This is the big one, and it deserves its own example.
A worked example: the project that was dead at 5%, alive at 2.75%
Consider a BC distribution business weighing a $500,000 investment in warehouse automation. The equipment is expected to generate $95,000 per year in labour and efficiency savings over a 7-year life, financed entirely with debt.
Scenario A — evaluated at the 2023 peak. Borrowing costs the business roughly 9 per cent all-in (prime plus a margin when the policy rate sat at 5 per cent). Annual interest in the early years runs near $45,000, leaving net annual benefit of about $50,000 against a $500,000 outlay — a payback past 7 years once you account for declining balances and risk. The owner, reasonably, shelves it.
Scenario B — re-evaluated at 2.75 per cent. All-in borrowing now sits near 6.5 per cent. Early-year interest falls to roughly $32,500, lifting net annual benefit to about $62,500. The effective payback tightens to comfortably inside the equipment's life, and the project clears the firm's hurdle rate with margin to spare.
Same equipment, same savings, same building. The $12,500 per year of avoided interest is what flips the decision from "no" to "yes." The discipline here is the word re-evaluated: the owner did not approve the project because money got cheaper, but because the project now clears the hurdle on its own merits at the real, current cost of capital.
Reset your hurdle rate — but don't reset your judgment
The single most useful exercise this quarter is to update the hurdle rate you use to screen investments. If you are still mentally screening projects against the cost of capital you faced in 2023, you are rejecting good projects. Lower your hurdle rate to reflect 2.75 per cent borrowing — but do three things to keep the discipline intact:
- Build in a tariff/demand stress case. Given the trade uncertainty the Bank itself flagged, every reactivated project should survive a scenario where revenue softens or input costs rise. Cheaper money does not rescue a project whose demand assumptions collapse.
- Protect liquidity first. Use part of the interest savings to strengthen your cash buffer before deploying it into capex. In an uncertain demand environment, a thicker runway is itself a return.
- Stagger commitments. Where possible, phase capital spending so you can pause if trade conditions deteriorate, rather than committing the full amount up front.
What about your line of credit and working capital?
The rate cut also lowers the carrying cost of revolving debt. If you have been running a high operating-line balance to fund receivables and inventory, the cheaper rate is welcome — but it is not a reason to carry more revolver debt as a habit. Use the lower cost to accelerate paydown where you can, and tighten the working-capital cycle (receivables, payables, inventory turns) so you depend on the line less. Lower rates make sloppy working capital cheaper to finance, which is precisely why disciplined owners use the moment to clean it up rather than lean on it.
Match the financing to the asset
One discipline the high-rate years eroded is matching the term of your financing to the life of the asset it funds. When every dollar of credit felt expensive, owners often crammed long-lived purchases onto short-term lines because the rate looked similar. With rates reset, restore the principle: fund long-lived assets — equipment, leaseholds, expansion — with appropriately termed debt, and reserve the operating line for genuinely short-term working-capital swings. A seven-year automation investment financed on a demand line is a covenant breach or a liquidity squeeze waiting for the next surprise. Terming it correctly at 2.75 per cent locks in a known, manageable cost and keeps your revolver free for its actual job.
This is also the moment to revisit covenant headroom with your lender. Lower rates improve your debt-service coverage almost automatically, which can create room to renegotiate terms, extend amortizations, or release security. Lenders are more receptive when your coverage ratios have improved — so a proactive conversation now, from a position of strength, often beats waiting until you need a concession.
Key takeaways
- The Bank of Canada cut its policy rate to 2.75 per cent on March 12, 2025, materially lowering borrowing costs from the 5 per cent peak.
- Update the hurdle rate you use to screen investments; projects that were dead at peak rates may now clear on their own merits.
- The cut arrives alongside real US-tariff-driven demand and cost uncertainty — stress-test every reactivated project against a softer scenario.
- Refinance peak-rate debt where prepayment penalties allow, and make the variable-versus-fixed choice deliberately, not by default.
- Use interest savings to strengthen liquidity and clean up working capital before deploying them into new capex.
Cheaper capital is an invitation, not a verdict; the owners who prosper are those who re-run the math with fresh eyes and steady judgment, not those who mistake a lower rate for a green light.
If you want help resetting your hurdle rate, modelling a refinancing, or pressure-testing a shelved capital project against today's rates and tariff risk, RN Canada offers fractional CFO and advisory support to established BC businesses. Let us help you put the cheaper capital to disciplined work.