A Long-Term Game Plan for Winning Capital Decisions
When the Federal Open Market Committee met in June to raise its benchmark interest rate for the first time in 2017, it stirred up plenty of excitement among finance decision makers and economic prognosticators.
Having watched the interest rate scoreboard as a commercial banker over the past 20-plus years, my advice from the sidelines is this: Stick to your long-term game plan and put your company in a position to win when it comes to the cost of capital. Here are a few strategies to keep your head in the game:
- Don’t overreact to the “officials.” The Fed is like an economic referee, making calls to control the economy’s pace. Don’t lose your cool when the whistle blows. When the Fed increases its rate, keep the rising cost of borrowing in perspective. Compared with pre-financial crisis lending, today’s rates remain relatively low and borrower-friendly. Although more hikes are anticipated this year, they are expected to remain modest.
- Maintain your game plan. When rates climb, don’t throw out your playbook. Instead, call a time out and consult with your banker to ensure your borrowing decisions match your company’s long-term plans and goals for continued growth and success. If you don’t need the capital, don’t borrow just to lock in the lowest rate. Borrow if you must, but have a good reason for it.
- Clock management. Think about timing when it comes to borrowing. While rates remain relatively low, you might consider making a few key borrowing moves now to fund some crucial projects, and wait to fund other projects later in the game. Consider the purpose of the debt on your balance sheet. Would your company benefit from having a mix of floating and fixed rates?
- See the court. Don’t focus on interest rates alone for your capital strategy. You need to be aware of other negotiated factors when funding your company’s financial future. Besides interest rates, other terms—loan maturity, advance rates and guarantees—can offer great value. Many times, it makes good strategic sense to pivot from the interest rate toward other terms to advance your company’s medium- and long-term game plan.
Now’s the time to huddle with your banker or risk advisor to learn more about your options. They should be able to provide valuable information on everything from simple fixed rate loans to more sophisticated interest rate swaps. Work with your banker to find financial plays that match your company’s risk appetite. Keep a level head and approach rising interest rates with a discerning eye. iBi
Jeromee Hermann is senior vice president and regional manager for Wells Fargo Middle Market Banking in Central Illinois.