Rising rates are going to be part of business climate for the foreseeable future. By keeping a few best practices in mind, as well as a healthy perspective, you can successfully navigate borrowing during this higher rate environment.
By Dan Furman
For the better part of the past calendar year, companies have had questions regarding rising interest rates. They range from how long will they keep going up? When are they coming down? And, most importantly, what should they look out for when borrowing amidst rising rates?
To answer these, here are some thoughts on rising rates as well as best practices for borrowing in a higher-rate environment.
How Long Will Rates Keep Rising?
This is the million-dollar question, and the true answer is “nobody really knows.” The Federal Reserve spent all of 2022 continually raising rates to combat inflation, so the prevailing thought is until inflation levels off and then begins to fall, rates will keep going up. And inflation has been stubborn to date.
Looking at historical precedent, as well as listening to economic experts, it is likely rates will keep rising well into 2023. Even when we eventually hit the peak and they do stop rising, the decreases will be slow to start, and then happen gradually. It is likely that for the next year, the rate you see “today” (whenever “today” is) will be the lowest one you see for quite some time.
What to Consider When Borrowing in this Type of Environment
Since borrowing and financing are a standard practice for most successful companies, there are some best practices companies can employ to ensure they are getting the most out of their financing and leasing deals.
#1: Get a Fixed Rate
Fixed rates lock you into whatever the rate is when you borrowed. In an environment where they are rising and expected to rise further, this shelters you against future increases. As mentioned, it is very likely that rate increases are far from finished. So, getting a fixed rate is paramount—it is predictable and safe, and most CFOs and accountants like those two words. They let you know the net cost of a loan ahead of time and allow for accurate budgeting and forecasting.
#2: Be Aware of Liens and Restrictions
Restrictions like blanket liens and minimum balance requirements can tie up assets for years, limiting a company’s financial flexibility. Ironically, these restrictions are typically present with the lowest rate (the restrictions are the very reason the rate is low, but that is for another article). This makes it likely companies will see more of these restrictions as they shop for lower rates.
When borrowing, ask about restrictions, covenants, and liens before entering into any finance agreement, and be sure you are completely comfortable with them. Sometimes an extra point of interest is worth it if it eliminates restrictions that tie up your money and/or assets for years.
#3: Do Not Be Afraid to Borrow When Needed
This may seem simplistic, but the truth is that many companies turtle up when rates start rising and put off borrowing in hopes for a lower rate later. However, as mentioned earlier, lower rates are not on the horizon. So, all a company does by waiting is miss out on needed equipment or expansion, and eventually pays an even higher rate when they have no choice but to borrow later.
A Matter of Perspective
Here’s an anecdote that illustrates this: last year we had a customer all set to purchase a needed piece of equipment. While they were having internal discussions in choosing a model, the first 0.75 rate increase of the year happened. This caused them to panic, and they were about to pull out of the deal, thinking “we lost” (their exact words). However, after thinking about it (and listening to the owner’s father, who reminded them what he paid for interest in the 1980s), they went ahead with it despite the interest rate increase.
Two things happened: they got the needed equipment, which was immediately put into the field and earned revenue, and they locked in before the next several 0.75 increases. So, by locking in before further increases, they actually “won”.
Also, big props to our customer’s father, who recognized that “high and low” rates are relative and often a matter of perspective. In his day as a business owner, borrowing money was a lot more expensive. When looking at the history of the Federal Funds Rate, even though rates are rising now, they are still quite low historically-speaking. Again, it can be a matter of perspective. Rates will come down again, but it may take awhile.
Wrapping Up
Rising rates are going to be part of our business climate for the foreseeable future. It is important to remember that everyone is affected—you and your competition both. By keeping a few best practices in mind, as well as a healthy perspective, you can successfully navigate borrowing during this higher rate environment. | WA
Dan Furman is a writer and the Vice President of Strategy at Crest Capital, which offers small and mid-sized companies financing for new and used equipment, vehicles, and software, as well as offering equipment sellers a simple and risk-free financing program. For more information visit www.crestcapital.com.
*All views expressed in this article are those of the author and do not necessarily represent the policy or position of Crest Capital and its affiliates. These views are also opinion, and not meant to be taken as financial advice—always speak to your accountant or tax professional regarding any financial matters.