US Businesses had mixed reactions after the Fed released their minutes last October. The decision everyone was waiting for was what the Fed would do with interest rates. The meeting yielded a decision that they could begin raising rates as early as this year, and some analysts believe it may be as early as the summer. To begin the changes, they put a stop to their bond-buying program last October. As many of us recall, the Fed’s target for the interest rate has been zero for the last six years to prop up a struggling economy. And we’ve seen the impact that has had here in Utah—a stronger and growing economy, lower unemployment, and excellent interest rates for financing the growth of our companies and the purchase of homes and other real assets.
Take Advantage of Rising Interest Rates
So you’ve taken advantage of low interest rates, but how can you take advantage of rising interest rates? As a business owner, there are a few ways you can manage your debt to take full advantage of the opportunity. Your company may not be large enough to justify issuing bonds, but one of the first ways is to lock in any fixed, long-term debt that you know you will need in the future, before rates go up.. If you lock in now, you will be able to take advantage of the currently low rates, and the sooner the better. The closer we get to higher interest rates, the more expensive financing growth may become. Any kind of variable rate debt including many revolving lines of credit won’t benefit much from this strategy, however.
The second way to approach the interest rate environment is to consider how different industries will be impacted, and look to take advantage of the impending turmoil in those industries. First, technology will benefit as they tend to have a stable capital structure with mostly equity and small levels of debt given their high profit margins and cash reserves. Industries that rely on higher levels of debt to finance inventory or capital projects may be hurt more in the wake. Those industries may include utilities, oil and gas, and other low-margin product or commodity-based companies. In essence, the more dependent your company is on outside capital, especially debt, the more difficult growth may become as we see these changes take shape. Those turmoil-stricken industries may be riper for innovation, entrance by your company, or could make interesting targets for acquisition or partnering as your cost of capital may be a lot lower.
If you want to discuss more specific ways that you and your business can take advantage of the changing interest rate environment, call us to discuss our CFO consulting options.