Business confidence is revving up. Consumer confidence is at a nine-year high. Manufacturing job openings are three times higher than their 2007 low.
And on December 14, the Federal Reserve announced its second interest rate increase of 2016 and called for three more in 2017.
So, how should middle-market companies react to the rising cost of capital?
With nearly 30 years of commercial banking in my rearview mirror, my advice to business leaders is straightforward: Keep both hands on the steering wheel and follow these four financial driving tips before making sudden corrections based on recent rate news:
1. Don’t overreact
It’s important to put the climbing interest rate into historical perspective. The Federal Reserve raised the range of the federal funds rate to 0.50 percent and 0.75 percent from rock‑bottom in late 2015. Compared to the pre-crisis lending environment, today’s rates remain historically low and borrower friendly. Although more hikes are anticipated over the next year, they are expected to remain modest.
2. Avoid knee-jerk borrowing
It’s true. There is upward rate pressure. So if you have specific borrowing needs, now’s the time to lock it in. However , interest rates should not be the driving factor when making borrowing decisions. If you don’t need the capital, don’t borrow just to take advantage of the ultra-low rates.
The same concept applies to shopping sales: You’re paying less, but are you spending on something you really need? Borrow if you must, but have a good reason for it.
3. Remember: It’s not all or nothing
Depending on what makes sense for your business, you might consider acquiring some capital now to fund some projects at the current rate and planning ahead to borrow more later to fund future needs. Don’t forget to consider holding a mix of floating and fixed rates. This allows you to hedge and still benefit from low floating rates, while also maintaining certainty for longer term, fixed rates.
4. Consider the big picture
The cost of capital should be only one of the factors considered when making borrowing decisions that impact your company’s financial future. Money remains pretty cheap. Besides interest rates, other negotiated terms — loan maturity, advanced rates, and guarantees — can offer great value. Many times, it makes good strategic sense to forego finding the lowest interest rate to secure the best terms to boost your company’s medium- and long-term success.
The important thing to remember is, don’t panic. Instead, consult your bank or its interest rate risks advisor to learn more about your options. They should be able to provide valuable information on everything from simple fixed‑rate loans to more complicated interest rate swaps.
Work with your banker to find solutions that match your company’s risk appetite. The goal: Ensure that your financial future is deliberate — not reactive, based on interest rates’ ebb and flow.
Take a page from the British: Keep calm and carry on.