Since the Great Recession, interest rates have been hovering around all-time lows. This is part of a strategy by the Federal Reserve to spur borrowing and kickstart the country’s economic engine. And, it worked. Our economy has rebounded powerfully.
That success heralded a time for change, and during 2018, the Federal Reserve raised interest rates 4 times. That has created a rising rate environment, which presents both challenges and opportunities for businesses of all sizes.
Interest rates impact not only the return you can expect on investments and other assets, but also the amount your business pays for loans and credit. And the effects ripple out over your overall business trajectory, cash flow strategy and plans for growth.
Given all that, we’ve compiled a few key things to know about a rising rate environment and what it means for your business.
Rising interest rates can mean higher returns on savings
That’s the good news: Rising interest rates mean that the money you’ve deposited is now eligible for higher returns. The bad news is, the level to which those rates rise is left somewhat to the discretion of individual financial institutions. So, while you may see a higher return, there’s no guarantee you’ll see the highest possible rate out there.
That’s where deposit management services can provide significant value. At ADM, for example, we can spread your business’s extra cash around to our network of banks and credit unions to find you nationally competitive returns — which typically results in earnings of 7 times the national average money market fund. It’s a valuable addition to your overall cash management strategy, particularly when rates start to rise.
Rising interest rates can mean higher debt payments
If you have fixed-rate loans for your business, you’re in the clear. However, if your loans have variable rates, the rising interest rate environment could lead to higher monthly payments. That not only increases your overall expenses, but it also poses a threat to your cash flow, which is critical for maintaining day-to-day operations.
There are a couple of options to explore here: The first is a conversation with your bank or lender to determine if there’s any flexibility in your rate increase. If you’re not able to fix the rate for a given period of time, there’s a chance you may be able to secure a smaller increase, at least in the short term.
The second option is to revisit your cash management strategy. Take a look at what you’re doing with you excess corporate cash, and consider taking advantage of deposit management services, which will get you higher rates of return while keeping that cash liquid and secure, with the backing of FDIC / NCUA insurance.
The best-case scenario: do both. Start the conversation with your bank, and take steps to make the most of your extra cash.
Rising interest rates can mean higher costs for growth
If your business has big plans for growth, you may want to consider the impact rising interest rates will have on how much that growth will cost. If you will need loans to purchase a building or make another significant investment in your business, those loans will come with a higher interest rate, costing you more money over time. Those costs have a trickle-down effect, playing a role in determining your cash flow needs and other budgetary concerns.
That said, rising interest rates shouldn’t necessarily postpone your plans for growth. In fact, higher rates are an indicator of overall economic strength. And in a strong economy, businesses generally do well.
Rising interest rates can make short-term investment strategies more attractive
Now is the time to explore the impact short-term investment strategies could have on your business. When interest rates are dropping, longer-term investment opportunities are sometimes more appealing as you can lock in rates before they drop. When rates are rising, however, short-term investment strategies become much more appealing as shorter commitments can offer the flexibility to take advantage of the higher rates as they rise. Investments such as certificates of deposit (CDs), interest-bearing checking accounts and high-yield business savings accounts are good examples of these short-term investments.
Rising interest rates can mean your credit cards will cost more
We’ve talked a lot about loans and investments, but credit cards are often impacted by increases in interest rates in a big way. The higher the interest rates, the more money you will pay on balances you carry month over month. So, in a rising rate environment, don’t forget about rising APRs on your credit card accounts. And, be sure to evaluate the impact that a rising credit card rate has on your cash flow and balance sheet. In general, the rising rate environment is a good sign for business. It just requires a few adjustments to your cash management strategy and business growth planning. To find out how ADM can help, with our proprietary technology and deposit management services, contact one of our friendly associates today.