Small Businesses Rush to Finance Operations Ahead of Rate Hikes

The Federal Reserve Bank is expected to wrap up its 2-day meeting on Wednesday, 15 March 2017 with a decision to increase rates. The federal funds rate is currently standing at 0.50% – 0.75%. FOMC policymakers have been dropping hints that a rate hike is imminent. According to the CME Group FedWatch tool, there is an 84.1% probability of interest rates increasing by 25-basis points in March. This means that the federal funds rate (FFR) will rise to 0.75% – 1.00%. The impact of rate hikes on the private sector and the corporate sector will be telling. For starters, individuals and companies with loan obligations will soon be paying more on their variable interest rates, while those with cash invested in fixed-income bearing securities such as savings accounts, CDs and the like will earn higher rates of interest.

Cashing in Before Rate Hikes Hit Home 

For many individuals, the prospect of higher interest-rate is an anathema.  Even a minuscule increase in rates has an exponential impact on rates charged by banks, since they don’t operate at the federal funds rate. Much the same is true of credit card debt which rises well beyond the 25-basis point hike of the FFR. On a business level, loans are invaluable. Unfortunately, rate hikes generally lessen the attractiveness of business loans, given the huge interest repayments that must be made. Nonetheless, venture capital, loans and cash injections are the lifeblood of small business operations. A well-managed loan is one that can grease the wheels of a company, providing for everyday expenses and smooth functioning of the enterprise.

Companies or individuals seeking to finance a business plan generally rely heavily on business loans for things like expansion of a physical location, building credit for future purposes, upgrading equipment, or buying additional inventories. These and other reasons are the primary motivators for small business loan applications. For many entrepreneurs, the economic climate is ripe for the picking. The Trump administration is seeking to push through massive fiscal stimulus in 2017, with $54 billion – $84 billion in infrastructure expenditure. This will drive multiple sectors and industries including building and construction, metals and mining, oil and energy et al. Small business loans also enable entrepreneurs to evaluate the merits of risking capital for lucrative opportunities.

In a cash-strapped society, where the success of Wall Street doesn’t always filter down to Main Street, business loans are effective resources to grease the proverbial wheels. Cost-benefit analysis on loan repayments versus benefits are essential.  The purchase of machinery, equipment, expansion of facilities or investments in lucrative opportunities are expected to yield returns that justify the loans. With all the economic opportunities in the pipeline, businesses are also seeking to shore up their human resources with qualified personnel. To attract this type of talent, companies are investing heavily in human resources development. Overall, business loans are a useful resource to have during times of high competition, innovation and change. Provided the loan capital is used effectively and productively, the risk is mitigated by the potential payoff.

Important Facts to Consider Before Applying for a Loan

Big banks like HSBC, Citigroup, JPMorgan, Wells Fargo Company or Bank of America typically deny most small businesses loans. In fact, the percentage of denied applications runs at approximately 82%. A big part of the reason for this is the risks that banks take on when granting credit to small business as a result of the failures in the 2008 global financial crisis. The cost for banks to underwrite small loans is equivalent to the costs for banks to underwrite large loans. Fortunately, funding sources are not limited to big banks alone. Online lenders have come into prominence in recent years and they are now a powerful force in the loan market. As always, due diligence on the part of small businesses is required, and the corporation’s creditworthiness is gauged alongside the viability of the small business plan. While many loans are made in fiat currency, it is not outside the realms of possibility that cryptocurrency will soon become a viable option when regulatory measures are put into place.

Cover Image via Michael Dunn

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