According to a recent article in the Washington Post, economists are warning that specific economic signs are pointing to a recession. As a result, experts believe the Federal Reserve will begin to lower interest rates in an effort to reinvigorate the economy.
If your business is prepared for a market correction, it can be an advantageous environment for borrowing money.
To Borrow or Not to Borrow
Taking out a loan during a period of lower interest rates may seem like a no-brainer, but there are things to consider in order to put your business in the best situation:
- Long-term or Short-term? One of the signs of an impending recession is the occurrence of an inverted yield curve. An inverted yield curve is an anomaly in the market when interest rates are better on a longer-term loan than a shorter-term loan.
Typically, the Treasury (for bonds) will pay you higher interest for a five-year bond than a one-year investment to reward you for letting them use the money for a longer period of time. Similarly, a bank (for loans) would charge you higher interest for a five-year loan than a three-year loan or on a 30-year mortgage than a 15-year mortgage because you are holding onto that money for a longer period.
Right now, that scenario is backwards – or “inverted” – in some cases, meaning it may actually be cheaper to take out a loan with longer terms.
- Cash Flow. Taking advantage of low interest rates can be a smart way to save money on planned activities, such as buying new equipment or bringing an older facility up to date during a remodel. Be sure to evaluate how using existing capital versus a loan may impact your cash flow cycle. How much capital can you afford to tie up during a recession, which could slow growth and reduce profits indefinitely. Your banker may have ideas for minimizing risk by using certain loan products or suggesting a line of credit.
- Understand Your ROI. Oftentimes, we choose to borrow money in order to invest in new equipment, new product development, or a new facility to increase production. These types of investments should eventually produce a return. Figure out what success looks like. In other words, what needs to happen for your business to benefit from the investment.
Bring Your Banker into the Loop
When a recession hits, the tendency is to worry about your finances alone and shut out the very experts who could help you navigate the down times.
Instead, I encourage you to keep your banker in the loop regarding any challenges your business is facing. We can help you address and mitigate the risks because we have often seen a similar situation before. We may have a solution you hadn’t considered.
In addition, partnering with a community bank like State Bank of Cross Plains means you have chosen a financial friend to your business. You are not just a loan number to us. Your business is part of the community where we live and work, and we want to see you succeed. We may be able to update terms or revise a payment schedule to get you through a difficult time. Don’t be afraid to talk to us about what’s going on.
Accentuate the Positives
While nobody wants to face a recession or even a smaller market correction, there are always some positives to take away from those economic downturns. By being aware of current conditions and understanding your options, you may be able to find ways to benefit from lower interest rates.
Let your SBCP business and commercial banker help you make it happen.