Uncertainty within the interest rate environment combined with the volatility of the equity markets has created hesitancy in many businesses when it comes to making investments that require debt.
“Even though rates have recently come down — a good thing for borrowers — the uncertainty of what the future holds has clouded decision making, which has led some companies to pause plans for capital activities that would require debt to execute,” says Wesley Gillespie, President of ERIEBANK. “This is a good time for companies to strengthen communications with their banker regarding their plans so that a conversation can be had about how best to achieve them.”
Smart Business spoke with Gillespie about loan strategies and other funding considerations for businesses in today’s interest rate environment.
How are bankers helping companies navigate uncertainty?
Commercial and industrial companies have acclimated to the current interest rates after a period that saw the rates increase more than 5 percent over the course of a couple years. Just as they’ve stabilized their approach to their debt, new uncertainty is blanketing the market. Now, companies are working to determine how best to fund future projects when that stability could be upended.
Because of this uncertainty, companies should work to build stronger relationships with their banker. Make sure there is strong communication with bankers, particularly around capital investments that they plan to make over the next 12 to 36 months. With a better sense of the state of the business and their plans, bankers can help business leaders make better decisions based on data, and what they’re seeing from a banking standpoint.
Bankers will help companies identify areas where the business could strengthen their cash flow, and help lay out plans for the best- and worst-case scenarios. They’re encouraging companies to try to make cash flow as predictable as possible. In this environment, that means not relying on what the company did previously, but forecasting what the next 12 months might look like through predictive models for the near and intermediate terms.
What can companies do to be in a strong position to take on debt?
There’s an emphasis from bankers on understanding a company’s planning and strategy over the next 12 to 36 months, and how that might play out in today’s environment. Defining the funding sources is the main concern in these conversations. It’s about understanding the mix of debt and equity in the company, as well as what the availability of debt and equity will be in the foreseeable future.
To grant loan requests, bankers generally want to make sure companies have adequate working capital, whether it’s through their own cash balance sheet or through a line of credit. Where there are constraints, equipment or capital expenditure lines can be put in place to make sure they can take advantage of opportunities.
It’s also important to understand how sensitive a company’s balance sheet is to interest rate risk. If a business has a lot of variable debt, they’re very sensitive to rate movement. But if most of the debt is fixed, they’re not as sensitive.
Bankers are also recommending non-lending products such as cash management, treasury management, lockbox, and similar banking products that can help improve or maximize a company’s cash flow position on a day-to-day, and monthly basis.
What should companies do today to be in a better position in the future?
These are valuable conversations that a good bank should be open to having with companies. Through them, a banker can learn how they can add value and help the borrower be better positioned for whatever might happen with interest rates.
In this climate of volatility and uncertainty, it’s not clear what’s going to happen and when. So, the best thing for companies to do is to have these conversations with a banker, get deeper into the financials, really understand their risk tolerance and then map a plan forward, especially for those who need financing in the short term, versus those who might be able to wait. ●
INSIGHTS Banking & Finance is brought to you by ERIEBANK.
