We’ve been in a low interest rate market for a long time, which means borrowing money has been cheap. As that environment changes, any variable rate debt your business holds can get more and more expensive. However, with high inflation in the mix, holding cash is also a losing proposition.
For growing businesses, or organizations that need to replace outdated equipment, this can present a challenging scenario. Should you try to make the purchase now, while borrowing is cheaper, even though your current equipment hasn’t outlived its lifespan yet?
Increasing volatility in the economy is stressful for everyone, but a deeper understanding of the situation can be helpful for both your short- and long-term decision-making.
Why Are Interest Rates Changing?
Historically, the Federal Reserve (“the Fed”) was formed in the wake of several financial panics and tasked with stabilizing the economy through control of the monetary system. The main tools they use to do that are 1) creating money and 2) setting the interest rates.
During the Great Recession, stress in the financial markets spurred the Fed to take a “dovish” stance—to lower interest rates—which made money cheaper to borrow. The Feds’ goal was to help spur investment in the economy and had kept rates low since then.
However, in recent years, the global pandemic caused the Fed to inject more money into the economy to stabilize the market against shutdowns. The drastic increase in the money supply, combined with pandemic-related supply chain issues and consumer demand for goods, has led to a lot of money and not much to spend it on. This can contribute to the devaluing of the dollar and, along with increasing prices for consumer goods, is experienced as inflation. A little inflation (a rate of around 2%) is one sign of a healthy economy, but rates higher than that are bad news.
Additional contributing factors to the rising prices come from international conflict and trade sanctions, which cause a reduced supply of internationally traded goods, like gasoline and other energy sources.
Due to the current inflation, the Fed is taking a “hawkish” stance and raising interest rates to try and curb it. When high inflation signals that the economy is growing too fast, the Federal Reserve can raise interest rates to discourage spending and slow down the economy.
The Fed must tread carefully here because, even though inflation is bad for consumers, raising interest rates too quickly could cause an economic downturn. Therefore, the current plan is small incremental increases in the interest rate, over the next year or so.
Take Advantage of a Rise in Interest Rates
For businesses, high inflation causes all internal costs to rise. From sourcing goods to paying competitive wages, you will probably have to spend more if you want to stay in business. For example, the cost of shipping containers overseas has increased more than ten-fold for some organizations!
And now you’ve got an interest rate rise to contend with. Is there any way to turn this financial instability into a tactical advantage?
- Sell Off Unused Equipment: The used market is hot right now. If you have any equipment that is no longer pulling its weight, now is a great time to sell it at premium prices.
- Lock in Low Interest Rates: The rise in interest rates has only just begun, so now is the time to look into fixed-rate financing for future projects.
- Invest in Technology: Reduce your labor costs by investing in automation, utilizing equipment financing and leasing to find affordable solutions.
Organizational decisions in a volatile market are always challenging. By proactively taking steps to mitigate financial instability, you position your company to withstand the uncertainties of the future.
Financing While Interest Rates Rise
If you’ve got projects that need financing, you might be tempted to put them on hold. Before you do that, talk to a professional – financing may be more affordable than you think!
If you’ve been considering large purchases, like an investment in new equipment, speaking to someone in the financing industry can help you make better decisions to protect your business from the challenges of rising interest rates.
At Team Financial Group, we take the time to get to know you and your unique business needs. We understand how higher interest rates can create a more complex business environment. Partnering with a lender who truly cares about seeing your business succeed makes a world of difference.
Don’t let interest rates stop you from achieving your business goals. Team Financial can help you get the equipment you need, with terms that are affordable for your bottom line.
Don’t Let Interest Rates Become an Obstacle
If you have questions or concerns about rising interest rates, give us a call. The experts at Team Financial Group can help you find a solution to your financing needs, even in challenging fiscal environments.