How businesses can make sense of rising interest rates

Businesses are understandably concerned about interest rates, as the ability to borrow money at competitive rates is paramount to their success.

When you hear news about “rates going up,” sources are talking about the federal funds rate, which is what banks charge each other. This rate is set by the Federal Reserve, and it’s the benchmark for all other lending rates.

When the federal funds rate goes up, so do rates for all other types of lending: mortgages, car loans, business loans, lines of credit and more.

The reason rates have gone up recently is to combat inflation. They already rose five times in 2022 as of press time, with the latest as of press time being a 0.75-basis point hike in September. If pundits are to be believed, there are many more hikes likely to come.

So, how long will this go on for? That’s the million-dollar question. The official answer is nobody knows, but it’s a given that until inflation peaks and then recedes, we are likely to remain in a higher-rate environment.

Still, a more pragmatic view can be taken to try and ascertain what this all means for businesses that need to borrow money.

What’s next for rates?

History, logic and gut feelings must be used to guide businesses ahead.

With five rate increases in 2022 alone – including three 0.75-basis point increases in a row – inflation remains high. It is unlikely the Fed is done raising rates. Most experts feel there will be continuous hikes over the next several months, and honestly, that’s sound thinking.

Just look at history: The federal funds rate rises and falls gradually, with the upward and downward trends spanning months and years. The only times they rise and fall faster than that is in response to extreme events such as stock market crashes, pandemics and runaway inflation.

Despite these sharp rate increases, inflation remains stubbornly high. And because inflation is high, more hikes are likely – with those being followed by a period of leveling off to “make sure.” When they begin to fall, rates will probably drop 0.25 basis points at a time.

How long will it be until rates start falling again? Well, it surely won’t happen in 2022, and it’s very likely they drop deep into 2023 at the earliest.

Will rates keep rising throughout 2023? That’s very hard to say, but it’s very possible. December 2023 rates could easily be higher than they are right now.

Should companies borrow?

A company’s CFO or accountant is the best person to ask about borrowing money right now. Companies must be realistic about the business environment, though.

Credit is too important to successful companies. If companies need to borrow, they need to borrow – regardless of if the rate is higher than it was yesterday.

Consider a scenario that developed earlier this year: A construction customer sought to finance a backhoe it needed, but the company was slow to pick out a model and it inadvertently missed the first 0.75-basis point rate increase.

When the company learned rates went up just days before its purchase, it felt gut-punched. The company called the lender and almost canceled. The company’s exact words were: “by waiting, we lost.”

In the end, the company really needed the backhoe. The lender talked about rates going up further. The company got its backhoe and put it in the field – and rates went up again a few weeks later. So the takeaway is that today’s rate might be the lowest one seen for quite some time.

Rates will come down again. It will take time, but companies must work with what’s presented. Right now, with more hikes likely, favorable borrowing conditions are still in play compared to past history.

Are rates as good as they were yesterday? No. But, then again, yesterday is gone. Forget about it, because tomorrow awaits. Work toward that.

Chris Fletcher is vice president of national accounts at Crest Capital, which offers small and midsized companies financing for new and used equipment, vehicles and
software.