Planning for Rising Interest Rates

Perhaps interest rates are going to increase this year and next ~ but don’t be alarmed. Rising Rates are a good thing. Interest rates, often, have a way of letting us know how our economy is actually performing. If rates are historically low, that is arguably a strong indicator that our economy is weak. To that end, most doubt that there will be significant movements in interest rates during 2017. The above graphic came from CNN and is part of a discussion regarding the December 2016 rate increase. https://money.cnn.com/2016/12/14/news/economy/federal-reserve-rate-hike-december/

For the last several years, our beloved central bank has employed a near-zero interest rate policy – or “ZIRP” as the financial world has come to know it. Central banks typically employ such dramatic measure to help the economy recover from severe injury (like 08/09) and give the economy training wheels, so-to-speak, while it is learning how to function again – and our training wheels have been on for a very, very long time. In December 2015, that policy came to an end with a .25% increase in the Fed Funds rate. So, what does it all mean to the business owner?

More expensive money

Increase in rates will mean adjustable rate debt will cost more. Lines of credit, credit cards, and some of the merchant cash-advance type businesses that lenders start will have raised your payment obligation by now. Fixed rates will see a slight increase for newly acquired loans as well. But not to fear – a ¼% rise in rates will likely have a minimal impact on cash flows. To put a real number on it, a $50,000 – 60 month term loan might increase as much as $10 per month. So don’t sweat the interest rate, look at the payment and you’ll see that impact in the near term is pretty manageable.

A rising tide

The quarter of a point increase, here and there, may be pretty minimal now, but business owners need to start thinking longer-term. We are still at historically low rates and the Fed will most likely continue with the periodic .25% rise in rates. In fact, we should all be planning on an environment of rising rates for the foreseeable future.

That could mean rates rising by as much as 2% or more in the next few years. The Fed will likely gradually increase rates .25% at a time to ease the impact, but business owners should  start planning on taking advantage of low rates now. Term debt will be cheaper now and might influence purchase timing. You might also consider converting adjustable rate debt to term debt where possible to minimize the long-term impact of the rate increases. Larger businesses should consider hedging interest rate increases with “swap agreements” that act as insurance against rising rates.

Have a plan

If equipment acquisitions are necessary down the road, you might start working with an experienced equipment lender now on how to best position the timing of these purchases against rising rates. Fed policies and the global implication of rates can be daunting things for the average business owner to consume, so rely on a trusted team of experts to help you.

When SLS entered the business world in 1986, the Prime Interest Rate was 9% & business was good and trending in a positive way. Here is a link to see the history of the Prime Interest Rate: https://www.fedprimerate.com/wall_street_journal_prime_rate_history.htm

At SLS, we keep things uncomplicated and are happy to be a resource for you as you plan for success with rising rates.