What Small Business Owners Should Know About Higher Interest Rates

Monday, April 10, 2017

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Many indicators tell us we are headed into a year of strong economic growth. Small business optimism and consumer confidence are at their highest since the Great Recession. Although interest rates are slated to rise, it is still worth considering investing in capital if it is the right time to expand your business. Here are some considerations to help in your decision making process.

Don’t overreact
Compared to the pre-crisis lending environment, today’s rates remain historically low and borrower-friendly. Although more hikes are anticipated over the next year, they are expected to remain modest.

Avoid knee-jerk borrowing
It is important to put the climbing interest rate into historical perspective. The Federal Reserve raised the range of the federal funds rate to 0.50 percent and 0.75 percent from rock bottom in late 2015. These are very low compared to pre-recession rates.

Remember: It’s not all-or-nothing
Depending on what makes sense for your business, you might consider acquiring some capital now to fund some projects at the current rate and plan ahead to borrow more later to fund future needs. Don’t forget to consider holding a mix of floating and fixed rates. This allows you to hedge while still benefitting from low floating rates and maintaining certainty for longer-term fixed rates.

Look at the big picture
The cost of capital should be only one of the factors considered when making borrowing decisions that impact your company’s financial future. Besides interest rates, other negotiated terms like loan maturity, advanced rates, and guarantees can offer great value. Foregoing the lowest interest rate, in lieu of the best terms to boost your company’s medium- and long-term success, can be a deciding factor as well.

Work with your banker to find solutions that match your company’s risk appetite. The goal should be to ensure your financial future is deliberate and not reactive on interest rate ebb and flow.

Joseph Mishriki, Wells Fargo Inland Orange County Hills Area President

Category: Business News