The Federal Reserve administers a key economic indicator, the federal-funds rate. Banks use the federal-funds rate to conduct overnight transactions which trade account balances maintained at the Federal Reserve. When the Fed raises this key rate, personal and business loan rates follow closely behind. In September 2014, the Fed signaled that its six year practice of maintaining a near zero federal-funds rate would likely come to an end at some point in 2015. Policymakers specifically signaled a 1.25% federal-funds rate by the end of 2015 with additional increases on the horizon for 2016. In light of these likely interest rate increases, we hope you will consider three business tips for 2015:
- Lock-In Financing Sooner Rather Than Later. Cash is king. If you are able, it is always better to grow your money via higher interest rates rather than dilute it by paying interest to the bank. With that said mortgages, equipment loans, lines of credit, etc. are reality for many of our clients. Adjustable rates will likely rise over the next couple of years, so it makes sense to lock-in long term financing sooner rather than later. If your business model involves short and/or long term debt, it would be wise to re-visit your interest rate structure in the near future.
- Beware Line of Credit Balances. Lines of credit rates are usually tied to the prime rate (which runs approximately 3% above the federal-funds rate). Businesses which maintain balances on their lines of credit will likely see increased carry costs in the near future. Obviously, customers with added carry costs enjoy less cash on hand to conduct the transactions they have over the past six years of near-zero Fed interest.
- Closely Examine Assets and Security. Interest increases naturally cause businesses to look into refinancing assets. Lenders often utilize multiple sources of collateral, complicating refinancing efforts. New loans often seek new collateral. Cross-collateralization typically requires an existing lender’s consent to a new secured loan, so be careful.
– Chad J. Cochran