Companies in industries that have highly
leveraged balance sheets should renegotiate interest rates now if they have
not already done so, according to Will
Thatcher, vice president and affiliate head of
business banking for Fifth Third Bank.
“Your bank should always be willing to
review your companies’ financial position,
and reviewing interest rates in a reducing
rate environment is part of that,” Thatcher
says. In times of volatile interest rates,
there are several opportunities for both
borrowers and depositors to improve their
financial situations.
Smart Business spoke with Thatcher
about interest rates and what companies can
do to combat them in today’s market.
Are banks really happy to renegotiate rates?
Banks are trying to manage the fact that
interest rates are moving around. I would
always tell people to meet with their banker
to take advantage of the situation. The same
thing holds true if interest rates are headed
up. We know higher rates make it more costly to run a business. In fact, the more capital
intensive your business is, the more important it is to meet with your lender — no matter which way rates are going.
Which way are rates going?
There is definite downward pressure on
interest rates. There is discussion that at the
next Federal Reserve meeting the Federal
Funds Rate may fall as much as 50 basis
points. The yield curve continues to be inverted. That is, the cost of borrowing money for
the short term is greater than that of long
term. This will place some stress on companies and individuals that rely on returns on
liquid investments for income as banks and
other financial institutions reduce the
amount of interest paid out. Contrary, the
individuals and companies that have large
amounts of debt to repay may be able to
review their strategies for financing indebtedness and lower their overhead costs.
So, these are strange times?
Everyone who has been in the banking
industry for a while agrees we’re in a situation that we’ve not seen for a long time. My
advice, if you are looking to borrow money, is
to utilize a fixed rate, for the environment is
at historical low levels. Do not attempt to
time the market for its lowest trough, for
interest rates can turn quickly. Rather, make
certain that your ROI analysis works for the
level of debt and productivity you expect for
the asset to be purchased. Also, talk to your
banker about performing an interest rate
buy-down. Most likely a fee will be incurred
to break an existing contract, but the interest
rate received may be lower.
What about my other business accounts?
As rates move around, your earnings credit
rate (ECR) will adjust. ECR is the interest-like payment banks give customers in lieu of
interest. As interest rates fall, the ECR falls,
too. So, revisit your depository relationship.
Decide which features you need since, in
effect, a lower ECR costs you more for each
transaction, whether online banking, check
writing or ACH activity. When rates go back
up, add back the ‘nice to have’ services since
you will get a higher ECR. They effectively
become free add-ons. It’s like frequent flier
miles — use them or lose them.
What about deposits?
If you are a depositor, you may not want to
tie your money up long term. Therefore, meet
with your banker to review other investment
alternatives inside the organization, i.e. brokerage, insurance, commercial paper, other
than certificates of deposits.
Is rate volatility good for real estate?
As rates go down, it is quite favorable for
real estate. Interest is the most significant
cost for most borrowers. A $2 million property will cash flow better at 6 percent than at
7 or 8 percent. If you are selling, look for a
price premium, since the cost of the property
to the buyer is effectively lower. Since you
are likely to find more people interested in
buying, it might be a good time to take your
gains and move on. If you are building a large
building or buying large, expensive equipment, your bank can lock in your rate a year
in advance using interest rate hedges or
derivatives to manage risk. That way you
won’t run into a difficult situation a year from
now if rates rise before the building is completed. This is also a good time to look at leasing equipment. The tax advantages inherent
in an operating lease are still present, while
the overall monthly payment will fall as well.
How long will the topsy-turvy situation last?
I don’t know that we have a pulse on it, but
there is certainly a bias towards further rate
reductions. A common mistake by business
owners is that they try to ride the variable
rates down as far as possible and then lock
into a fixed rate agreement. My recommendation — don’t be greedy. Pick a target with
your banker. When rates creep to that number, lock in your rate. If you fear rates are rising, lock them in fast. Talk to your vendors,
too. Low interest rates may have lowered
their costs as well. It may be time to revisit
the cost of items you buy. But remember,
playing interest rates will make you less
money than what you do for a living. Manage
your interest rate to a target. You may lose if
you wait for the lowest rate.
WILL THATCHER is vice president and affiliate head of business banking for Fifth Third Bank’s Cincinnati and Kentucky markets. Reach
him at [email protected].