For the last several years, our beloved central bank has employed a near-zero interest rate policy – or ZIRP as the financial world has come to know it. Central banks typically employ such measures to help the economy recover from severe injury (like in 2008/2009) and give the economy training wheels, so to speak, while it is learning how to function again.
And our training wheels have been on for a very, very long time. In December 2015, that policy came to an end with a 0.25% increase in the Fed Funds rate. Rates have gone up multiple times since and it’s likely that the trend will continue for years to come. So, what does it all mean to the business owner?
If equipment acquisitions are necessary down the road, you might start working with an experienced equipment lender now to determine the best timing of these purchases against rising rates.
More Expensive Money
Rate increases mean adjustable rate debt will cost more. Lines of credit, credit cards and some of the merchant cash advance lenders will have raised your payment obligation by now. Fixed rates will also see a slight increase for newly acquired loans.
In the near-term, small rate increases don’t affect cash flow all that much. To put a real number on it, a $50,000, 60-month loan might increase around $10 per month. So the impact is pretty manageable now. But over time, it can be a big deal.
A Rising Tide
Business owners need to start thinking longer term. The Fed will most certainly not stop raising rates. In fact, we should all be planning on an environment of rising rates for the foreseeable future. That could mean rates rising by as much as 2% or more in the next few years.
The Fed will likely gradually increase rates 0.25% at a time to ease the impact, but business owners should start planning on taking advantage of low rates now. Term debt will be cheaper now and might influence purchase timing. You might also consider converting adjustable rate debt to term debt when possible to minimize the long-term impact of rate increases. Larger businesses should consider hedging interest rate increases with “swap agreements” that act as insurance against rising rates.
Have a Plan
If equipment acquisitions are necessary down the road, you might start working with an experienced equipment lender now to determine the best timing of these purchases against rising rates. Fed policies and the global implication of rates can be a daunting thing for the average business owner, so rely on a trusted team of experts to help you.