In just over 3 months, interest rates have risen from near 0 to 1%. Projected increases in 2017 and the current uncertainty surrounding economic policy have been dominating the business world news lately. For many business owners, the negative impacts are of primary concern. While speculation is rampant, there are some common-sense steps that you can take now to lessen these impacts:
With the second Federal Reserve’s rate increase in 3 months, now is a good time to consider recapitalizing recent equipment purchases to bolster cash reserves while rates are still near historical lows (remember 2006 when rates hovered around 5%). If you haven’t already evaluated the equity locked in your equipment purchases, even a “back-of-the-napkin” estimate is advisable before interest rates rise again.
Rising interest rates often lead to higher costs for borrowers. Even with small incremental increases, the cost of small business loans and lines of credit is likely to continue to increase throughout 2017 and 2018. Review your financing for long-term assets, such as commercial facilities, business equipment, and other capital-intensive investments for your company. Convert variable rate debt into low fixed-rate financing for all long-term debt tied to depreciable assets.
Review your financing for long-term assets and convert variable rate debt into low fixed-rate financing for all long-term debt tied to depreciable assets.
Rising rates impact your entire supply chain. From your suppliers to your customers, everyone is paying more to acquire what they need to survive and thrive. Your suppliers will likely pass those increases onto you and you may need to pass these along to your customers. In the end, your customer may choose to save rather than spend. Higher interest rates increase the cost of debt while also making saving more attractive. Both could affect supplier pricing and consumer spending.
Talk with your suppliers and customers about their concerns and arrive at solutions together. Sharing concerns and solutions will strengthen these important relationships and serve as a buffer to rising rates and possible downward trends in the larger economy.
Protect existing lines of credit and working capital reserves and explore alternate financing resources outside of your bank group.
Look at the overall financial picture of your business. Higher interest rates are not all bad news for businesses. If your cash reserves are strong, higher rates could mean your savings start to work harder for your business. If you’re an importer of foreign-made goods or if you buy supplies or inputs from foreign markets, you may have more buying power relative to foreign currencies which effectively lowers the costs of imports.
However, if cash reserves are low, you have a single source of funding and/or you have seasonal cash flows, it may be time to look for alternate financing resources outside of your bank group to protect existing lines of credit and working capital reserves.
Interest rate hikes act as a kind of “brake” to keep the economy from accelerating into a state of excessive inflation. By hiking interest rates, the Fed is giving a vote of confidence in the U.S. economy. As just a small cog in a huge machine, it’s important to focus on what you can control. Focus on what’s happening in your industry, with your customers, and at your company. Most importantly, focus on your finances and take these steps to hedge against future rate hikes.
At Regents, we are focused on results. We are committed to taking on challenges that banks and other finance providers try to avoid whenever markets tighten and rates rise. These challenges go beyond rising interest rates to include cash concerns, collateral challenges, complex project management and internal or external constraints.
Consider Regents as your equipment financing partner; not just provider. We can serve as a compliment to your existing bank resources or as a counterbalance when your bank rejects your application and restricts your continued growth. At Regents, we believe that as the economy grows, so should you.