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Growing Through Changing Rate Environments

With varying guidance and projections on what could be next for the markets, business owners and executives are left wondering about what type of economic environment they should be preparing for in the time ahead. Fortunately, there are steps that businesses can take to mitigate risk as they work to manage their overall financial picture.

Growing through changing rate environments

Whether you are looking to maintain your existing position or efficiently grow your business, effectively managing your balance sheet is a good place to start. Make sure you stay aware of how and where your overall financial picture and business plan could be sensitive to changing rates and different levels of inflation. Finding areas to optimize operating expenses and exploring opportunities to refinance and/or consolidate debt obligations can offset exposure to rate volatility and reduce some uncertainty in your forecasting.

It is important to know, too, how the existing economic conditions are impacting your clients and customers. For example, a building company may need to raise their pay as a direct result of inflation. That same company may also feel the impact of rising construction costs, which contribute to a slowdown in overall activity and available projects. Understanding how this scenario could also play out with a cooldown in inflation and lower rates is part of a prudent business management strategy.

Amid falling rates, the temptation may exist to “ride out” rate drops to secure financing at a more favorable cost, especially if there is a chance credit availability may expand while you are working to grow your business. For some businesses, the wait-and-see approach may be feasible. For those who need financing more immediately, an interest rate hedge can lock in a lower rate for a fixed term. In the case of an inverted yield curve (where long-term interest rates are lower than short-term rates), hedging can also provide immediate savings to your company and mitigate risk associated with variable terms. When rates start trending lower, it may almost seem counterintuitive to lock in a rate when financing is getting “cheaper” over time. Consider, though, that the fixed rate you lock in with your hedge can account for market projections on future rate activity, increasing the likelihood that the cost of your debt remains favorable over time.

Conversely, when short-term rates are low with a normal yield curve, hedging can still be a viable option if you do not want the unpredictability that comes with a variable rate. While the cost of swapping a variable rate for a fixed rate will come with a higher premium in this scenario, it also provides more predictability for your business’ cash flow. This can be especially beneficial when you are securing capital to support growth activity and need to control expenses.

Talking with your trusted financial partner, like your banker, can help you stay on top of changes that could impact your business. FNB is well-positioned to assist new and existing clients in any economic environment with strategies and guidance that enable your company to grow now and into the future.

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