Capitalizing on rising interest rates in your small business

by Kevin R. Draudt

 

Much of the last few years’ time has been filled with markets’ concern over the Federal Reserve’s raising interest rates. The Federal Reserve raises interest rates when there is growth and confidence in the United States’ economy. In the medium-term, rising interest rates indicate the economy is resonating with growth, and, with growth, comes opportunities for small businesses.

Higher interest rates signify a stronger economy. Although you may have to pay slightly more interest when rates increase in the short term; you will also receive more interest income in the short (to intermediate) term. Borrowers with fixed rates and lenders with floating rates are best positioned to capitalize on rising interest rates. Mortgages with fixed interest rates have likely been locked into a low rate; conversely, mortgages with floating interest rates will pay more interest expense as interest rates increase.

Ideally, your business should maximize interest received (Imagine a world where your savings account earns more than a few pennies every month) while also minimizing interest payments on your business’s mortgage or company credit cards. Most importantly though, higher interest rates typically lead to higher prices – meaning you will likely increase the price you charge customers for your services as economic activity continues to progress.

The Federal Reserve indirectly has the power to increase or decrease these payments and income, which flows through to the bottom line, and ultimately to your wallet. The Federal Reserve is expected to continue raising interest rates over the next few years, which provides several planning opportunities for mortgages and budgets to better position your business. The following ideas may help you to decide what financial strategies will best work for your business.

Commercial Mortgages
If you have a mortgage on your business property, consider the following to effectively lock in low rates to decrease your interest expenses and free up capital for your small business to spend (or invest) more efficiently.

1. Refinance: Office buildings, land, or any other commercial property that your business may have mortgaged provide great opportunities for refinancing to lock in current low rates.

2. Convert Floating Rate Loans to Fixed Rate: Mortgages are offered at adjustable or fixed interest rates. Remember that commercial mortgages differ from traditional mortgages, so keep an eye out for transactional or closing cost differences between banks.

3. Consider Interest-only Payment Options: Interest only commercial mortgages can be a powerful tool to decrease interest expenses, and, to free up cash flow for your business to allocate towards growth or investments.

Small Business’s Budgets and Cash Flow
Your business’s borrowing costs and revenues may experience a small negative impact from higher rates. If your business utilizes business loans with floating interest rates or lines of credit, you may have to pay slightly more than in the past. When they have not been accounted for, higher rates squeeze your cash flow and push down profits. Some planning options to minimize the possible impact of rising interest rates in your small business include:

1. Budget in Your Business’s Cost of Debt Increase: Depending on what types of debt instruments your business uses, budgeting in a 0.50% – 1.50% increase for your total debt payments over the next few years will help plan for possible cash flow shortfalls.

2. Refinance Small Business Loans: Similar to refinancing commercial mortgages, refinancing any other small business loans to lower, fixed rates may be a good financial strategy for your business. Refinancing is often much less time consuming than traditional bank loan applications and processes.

3. Shop Around for Banks: When it comes to loans, smaller banks and credit unions usually offer lower rates than large banks. Higher short-term interest rates will equate to higher returns on your savings, which differ among banks. If you are looking for a small business loan or sifting through the multitude of banking options, decide which bank is best for your hard-earned business’s savings.

4. Look for Future Financing Opportunities. Banks are hurting for business. The current state of the economy has encouraged individuals to pay off debt and to save, rather than take out loans from banks. Small businesses will likely be targeted by banks to fill their lack of business, meaning new attractive financing opportunities specific to small businesses.

 

Kevin R. Draudt is a 2015 graduate of Virginia Tech, where he majored in Finance with a financial planning concentration. After passing the CFP® Board Exam in March of 2016, Kevin is currently working towards completion of his CFP® certification requirements. Kevin is also a Level II candidate of the Chartered Financial Analyst program. As a member the Abacus investment team, Kevin’s responsibilities include investment research, asset allocation decisions and portfolio design.

Abacus is a financial advisory and investment counsel firm known for its passion in creating success for clients and family businesses through skillful listening and smart financial decision-making. Managing over $890 million on behalf of its 190 clients, Abacus consists of a team of multi-disciplinary experts who work collaboratively to serve its clients.