May 07, 2018
You might have heard that interest rates will be increasing steadily in the coming months and years.
In an effort to stimulate the economy, the U.S. Federal Reserve has provided the financial marketplace with ample liquidity since the 2008 financial crisis. This led U.S. interest rates to drop significantly and remain low for years.
But with increasing consumer confidence and payroll growth in recent years, the nation's central bank has made it clear that it plans to raise interest rates more frequently in the near future.
Rate hikes aren't necessarily bad news — they're a sign that the economy is doing well. But if you're looking to borrow, it may become more expensive.
You're probably wondering what this means for your company's outstanding debt or for your future expansion plans. And if you're flush with cash, you might be wondering how to best take advantage of these rising rates in the near future. Depending on your company's current financial state and your business goals, you might consider using one or more of the following strategies.
Tap financial professionals, such as bankers, accountants and financial planners, to help weigh your current debt portfolio and cash flow against rising interest rates. They can suggest which modifications to your suite of financial products will best meet your short- and long-term business goals.
“Your advisors can help you create a road map for which aspects of your debt can be fixed and which are more appropriate in variable rate structures," said Erich Klein, head of sales management for City National Bank's personal and business banking group. “That way, as interest rates rise, you insulate yourself to the degree that is necessary."
If you've been meaning to buy new equipment, beef up inventory or purchase a commercial building in the next year or so, now might be the time to lock in a fixed-rate loan while interest rates are still relatively low. Recent tax law changes that benefit business owners are another reason to step up your timetable.
For example, IRS equipment financing rules now let business owners deduct 100 percent of the expense of new and used equipment purchased during the same year, instead of over a several-year time frame, said Mary Helmich, manager of personal banking for City National's personal and business banking group. “Pause for a moment and see what tax law changes apply to you that you can perhaps take advantage of," Helmich advised.
If you have yet to revisit your overall debt structure with your banker and financial advisors, now is a good time.
“Pay attention to loan rates that are adjustable today or will become adjustable in the very near future," Helmich said. “It's a smart idea to evaluate your debt to ensure that the structure not only works for you today but two to three years from now - when it's almost certain that rates are going to be higher."
If you do have adjustable loans and debt, crunch the numbers to see whether converting to a fixed-rate product makes sense. But be aware that fixed-rate products won't always be the best, most cost-efficient choices for your particular circumstances.
In addition to taking stock of your business debt, you need to ensure your personal debt will weather rising interest rates.
“For small businesses, the business and the owner often are very intertwined," Klein said. That means if you run into trouble paying off your personal debts, that can affect your business cash flow and credit, too.
Many small business owners take out personal loans, credit lines or home equity lines of credit with adjustable interest rates, Helmich said. If the interest rates on your personal debt are likely to increase in the next year or two, it might be smart to refinance with a higher interest fixed-rate loan or to consolidate your debt in this manner. Make sure you work with your advisors to do the long-range math to ensure this is the best strategy for you.
For some companies, a higher interest-rate environment could hinder cash flow for a couple of reasons. First, you may have to pay more to borrow money. Secondly, your cash-strapped customers may not spend as liberally as they once did - or they may take longer to settle their accounts. Aggregating your outgoing expenses to a commercial credit card could be a way to regain control over your working capital.
Unlike a traditional business credit line, a commercial card won't cost you interest as long as you pay on time, Klein said. Plus, you may be able to earn cashback rewards or points — and you can use your card's online platform to track expenses.
If your company is reasonably flush with cash, you may be able to take advantage of rising rates by parking some of your reserves in higher-yield bank, money market or low-risk investment accounts. You may as well earn as much interest as you can from your liquid funds.
Also note that your bank's earnings credit rate is likely to increase as interest rates climb. Earnings credit is the allowance determined by the bank, based on your investable balance, and is used to offset some of your analyzed fees and charges.
And the greater the value of your business checking deposits, the more earnings credit you'll amass. “This may provide you with access to more services at your bank," Klein said, offering enhanced fraud protection and commercial accounting solutions as two examples. “Your deposits can go farther in supporting these banking expenses."
This article is for general information and education only. It is provided as a courtesy to the clients and friends of City National Bank (City National). City National does not warrant that it is accurate or complete. Opinions expressed and estimates or projections given are those of the authors or persons quoted as of the date of the article with no obligation to update or notify of inaccuracy or change. This article may not be reproduced, distributed or further published by any person without the written consent of City National. Please cite source when quoting.
City National, as a matter of policy, does not give tax, accounting, regulatory or legal advice. Rules in the areas of law, tax, and accounting are subject to change and open to varying interpretations. You should consult with your other advisers on the tax, accounting and legal implications of any proposed strategies based on your particular circumstances.
All credit cards, loans, lines of credit and other financing are subject to credit approval.