MICHAEL LAW, Senior Group Manager, N. California Commercial p: (925) 746-2805 e: Michael.Law@fbol.com Firstbanks.com
Although economic optimism is high, so are interest rates–at least from what we’ve enjoyed in the last few years. The Federal Re¬serve has already raised rates twice since December 2017, with more increases predicted in the near future. If you refer to the graph, in the last decade, rates have remained fairly steady and flat. As the economy improves, the Federal Reserve raises rates to stay in step with inflation. This creates what is known as interest rate risk. Investopedia defines interest rate risk as “the risk that an investment’s value will change due to a change in the absolute level of interest rates or in any other interest rate relationship.”
As a business owner, you may be asking how this impacts your business, your cash flow, and your overall monetary strategy? Obviously, as rates continue to rise, so will any variable rate loans. If you consider that we, as consumers and business owners, haven’t really had to think about interest rate risk for some time, this cur¬rent environment lends itself to now being a good time to start. It’s time to start thinking about it and having those meaningful conver¬sations.
We’ve all grown accustomed to variable and fixed rates not signifi¬cantly impacting our bottom line; however, as rates increase, that’s no longer the case. Perhaps, you’ve delayed purchasing that new business equipment or inventory for expansion? This may be the perfect time to evaluate and finalize those plans to lock in your borrowing rates.
For example, on a million dollar line of credit, if your rate was once 3.25% and then raises 2%, it could mean the difference of $20,000 to you. The significant additional cost each month could impact profit margins.
Map out a plan on how best to utilize your money, reserves, and cash flow. As a business owner, you also need to consider if you should build cash reserves or pay down debt? If the plan is to pay down debt, consider whether you are paying down variable or fixed-rate debt. If you have any questions on how best to use your money in this rate environment, don’t hesitate to contact your trusted advisors at First Bank. We can assess your immediate and future business needs to help you develop a plan to navigate the new rate terrain and potentially hedge your inter¬est rate risk.
We’re always here to help. Let’s strategize.
Sources: investopedia.com/terms/i/interestraterisk Data source: Federal Reserve Board