How business owners can navigate the current interest rate environment
With the U.S. Federal Reserve promising to raise interest rates as the economy strengthens, some business owners are wondering how higher rates could impact their borrowing costs and their ability to access credit. Daniel Van, Executive Vice President and Business Banking Performance Executive for Regions Business Banking in Birmingham, Ala., recently offered his insights and guidance on navigating the current lending environment — and what could lie ahead in 2016.
Q: The Fed is expected to raise interest rates very slowly. Should small businesses be concerned?
Van: I don't think so. It's never a good idea to try to outguess the Fed on monetary policy, and this environment is no exception. It's more important to focus on sound financial management practices irrespective of any immediate expectations around changing interest rates.
Q: How will a rate hike impact business owners and entrepreneurs trying to raise capital this year?
Van: An increase in short-term rates won't necessarily trigger an increase in longer-term rates, which is what a lot of small-business owners use to finance expansions or acquisitions. As always, though, planning for these types of events is very important, so getting your banker involved in the early stages is a great idea. He or she can walk you through a variety of financing options you may not have considered, based on your current debt load, asset base and cash flow, as well as your specific plans.
Q: What about businesses with outstanding loans? How will a rate hike impact their bottom line?
Van: That depends on what type of loan it is. If it's a fixed-rate loan, a rate hike may not affect the business at all. A lot of clients, though, have amortizing fixed-rate loans with balloon payments, and in those situations it's never too early to think about how those loans are going to be renewed or restructured. If they have to be refinanced in a higher-rate environment, that could impact your business, so, again, early engagement with your banker is a good idea.
Q: Businesses with variable-rate loans are likely to see their monthly expenses go up as interest rates rise. Could higher debt costs limit their ability to grow?
Van: It's possible, but we typically associate rising rates with a healthy, growing economy. So if a business is growing and making more money, rising profitability could offset higher loan costs. But when we think about growth and working capital needs in a rising-rate scenario, cash flow management becomes critical. We have many tools that can help clients use their working capital more efficiently, which might mean they wouldn't be affected by higher interest rates at all.
Q: Is this a good time to consider switching from a variable-rate to a fixed-rate loan?
Van: Every situation is different. You have to look at your entire debt structure, the mix of variable and fixed loans, the amortization of your loans and how that debt is collateralized. Getting just the right debt structure can be tricky, which is why we like to work with clients on an ongoing basis. That way we're not just responding to short-term credit issues but also designing a comprehensive set of credit solutions for their specific needs.
Q: Are there opportunities businesses should consider in a rising-rate environment?
Van: Yes. Now is a good time to explore opportunities. Rising interest rates don't just imply higher borrowing costs; they also mean that you may see higher returns on your cash and short-term investments. Many businesses are sitting on a lot of cash right now, so this is a good time to re-evaluate what to do with that excess cash and look at some opportunities on the asset side of your balance sheet.
Q: The credit market for small- and mid-sized businesses has been improving over the last couple of years. Do you expect it to keep expanding through 2016?
Van: I do. I think we'll continue to see economic expansion, especially on the small-business side. There is going to be an ample supply of credit, and we also expect to see concurrent improvement in credit demand.
Q: The Fed has said that it plans to raise rates slowly. How can business owners best prepare for a prolonged period of rising interest rates?
Van: It all comes down to sound financial management, which includes a comprehensive approach to debt structure, interest rate risk management, cash flow optimization and working capital management.
If we take it as a given that there is going to be a prolonged period of rising rates, then there is a real premium on making sure you have the appropriate debt structure and the right capital management plan.
Q: What questions should business owners be asking their bankers today?
Van: Think of your banker as your strategic partner. Ask him or her, "How can you and your bank align with me to help me achieve my long-term business objectives?" The conversations that can result from that question alone can add value in any economic environment.
