Interest Rates are on the Rise: Tips for Businesses
You’ve heard the news, interest rates are going up. Few businesses are completely immune from rising rates so now is the time to review your company’s current and future loans and make moves to minimize your interest expense going forward.
- Explore getting a fixed rate on variable rate loans – If your business has variable rate loans don’t wait for rates to go higher, talk to your bank (or another bank if needed) about locking in a fixed rate. Interest rates are still low from a historical perspective, locking in a 5-6% fixed rate will save you money when rates go higher.
- Renew loans with balloon payments – Many commercial real estate loans have a 10-year term with a large balloon payment at the end, expecting a refinance. If you are in the back ½ of the loan term consider refinancing early to lock in a lower rate. Loan agreements should be reviewed for prepayment penalties, but generally this refinance should be allowed. A refinance now hedges against the risk of rates being significantly higher in the coming years.
- Minimize the use of lines of credit and credit cards – Credit card interest should always be avoided, but especially now that the average credit card interest rate is approaching 20%. Lines of credit are almost always variable rate and a line that used to be 4-5% could soon be much higher. Focusing on collecting receivables timely and using the terms provided by vendors could help lower the use of credit lines and keep money in your pocket.
- Make sure tax payments are made timely – This is always a recommendation, but there are times where businesses defer estimated tax payments when cash flow is tight. The IRS and states have variable interest rates on late tax payments that go up along with other interest rates. Keep up with tax planning and make sure the government isn’t tacking on a little extra due to late payments.
- Find and maintain a good banking relationship – Banks generally have the lowest interest rates on capital (vs. leasing companies, short-term lenders, the SBA, etc.), but have the most stringent qualifications for their borrowers. A good banking relationship is worth the effort. A banker that takes the time to know your situation can sell your company’s story to the bank’s loan committee and be a driving force to get your loans across the finish line.
- Communicate – Ask around for advice, talk to your banker, accountant, or friends that are also business owners or managers. Every situation is unique and there are many options to refinance/consolidate/restructure debt. Communicating your businesses needs and wants will help you find the solution that is right for you and your business.
As always, let me or your Copeland Buhl representative know if you have any questions.