Article

Prepare Your Business for Rising Interest Rates

Posted by Melinda Toy on Dec 08, 2015 06:00:00 AM

Topic: ALL

Man looking at interest rates with lender

We are confident that we will see rising interest rates in the near future. Anticipation has been high since mid-2015, but it is becoming more likely that rising rates are something businesses may need to be ready for in the very near term.

It came as a surprise to many this past September when the Federal Open Market Committee (FOMC) of the Federal Reserve elected to keep short-term rates at the almost-zero level. With the next FOMC meeting on the horizon on December 15-16, 2015, businesses should be preparing for what lies ahead should interest rates rise. With preparation, businesses can take advantage of the positive aspects of an increase in rates.

With cheaper rates, the economy has showed signs of strength in 2015. Businesses have expanded; construction projects have increased; the unemployment rate has fallen to 5%; sales have increased across multiple staple industries. If lower borrowing rates make it easier for businesses to expand and hire, what will it look like if interest rates rise this December or in near-term?

As a business owner or leader, you should know what challenges and advantages a rising interest rate environment would present and how to prepare:

  • Review what you are borrowing and how you are financing it. Make sure you have a trusted financial partner who can advise what the best strategy will be for your business. Review financing for long-term assets like equipment and work with your banker to find potential opportunities to fix rates.

  • Take a look at what you are selling. Rising interest rates may also mean your customers are paying more for their own loans and may have less to spend. See if there are any ways to benefit from rising interest rates. Review your customer profile and focus on those segments that are earning higher interest returns themselves, and therefore, have more to spend on your products and services.

  • Anticipate a modest increase in costs of loans, deposits, and floating-rate lines of credits. Make sure you have a good accountant that can help you take the right steps to plan so there are no surprises.

  • Review your investment portfolio, including bond’s sensitivity to interest rates, or the fund’s average portfolio duration. You can review a bond fund’s average portfolio duration on sites such as com. The good news is that even if your bond fund value decreases, it could even out over a few years as your fund acquires new bonds with higher yields.

  • Keep an eye on international markets and currency exchange rates. Be prepared for how a stronger dollar may result from rising rates and affect any overseas business.

To learn more, contact one of our local Commercial Bankers.