Higher interest rates

With high inflation continuing to drive up costs throughout the U.S. economy, it comes as no surprise that Federal Reserve Chair Jerome Powell is pumping the brakes. During a recent speech at Jackson Hole, Powell explained that the Fed’s “overarching focus” is to bring down inflation to a goal of 2 percent. And while higher interest rates, slower growth and softer labor conditions will bring down inflation, he said it will bring “some pain” to households and businesses.

So, how should middle market companies react to the rising cost of capital?

With more than three decades of experience riding the waves of economic and interest rate fluctuations as a commercial lender, my advice to New Hampshire business leaders is simple: remain calm.

Business leaders can follow these five financial tips when making important decisions based on expected on-going hikes:

1. Don’t overreact. It’s important to put the climbing interest rate into historical perspective. Today’s rates remain historically low and borrower friendly. Although rate 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 today’s rates.
3. Analyze impact of higher rates. When mapping out your financial plans, it’s important to examine and analyze higher annualized interest rates on your forecast and budget. To do this, be sure to include a couple of assumptions for higher rates. Look at the impact on financial covenants, liquidity and the feasibility of a new project. Share the results with your banker and plan early if you see challenges ahead. It’s always better to engage early with your banker to address anticipated needs.
4. 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 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 lower floating rates, while also maintaining certainty for longer term, fixed rates.
5. 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 forgo 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 commercial banking relationship manager 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 is to ensure that your financial future is deliberate — not reactive — based on interest rates’ ebb and flow.

Paul Forester, commercial banking leader for Wells Fargo Middle Market Banking in New England including New Hampshire, can be reached at Paul.B.Forester@wellsfargo.com.