What Entrepreneurs Need to Know About the Fed’s Rate Rise
Citing strong economic progress, the Federal Reserve’s decision to raise rates for the third time since the financial crisis of 2008 has business owners asking when they’ll see banks tack the increase onto capital costs.
Announcing the rise at a press conference, Fed Chair Janet L. Yellen told reporters, “the simple message is the economy’s doing well”.
“We have confidence in the robustness of the economy and its resilience to shocks.”
The Fed expects that the increase of the federal funds rate won’t be the last in the near future, tentatively pencilling in two more over the next 12 months.
Although only time will tell when the cost of capital will be bumped by lenders, it’s important for business owners to remain alert if their access to capital is changing --- especially if the Fed predicts a brightening economic outlook.
Securing finance is traditionally easy to get when you don’t need it and when you need it, it’s hard to get, or it will likely cost you more. Low risk businesses are usually more able to access capital at a lower rate.
Constant cashflow vigilance is key here. By lining up capital flows in times where cash flow is good, you’ll save yourself from slipping into dire cash flow straits.
While any further interest rate increases will be done so gradually, entrepreneurs may be affected when trying to finance their businesses or even expand.
This is an opportunity for banks to step up to accelerate small business lending. And in the future we’ll see this trend strengthen through the financial web, a network of organizations sharing financial data.
When this data flows between accounting and banking systems, this is when we start to see productivity and growth unlocked in the small business market, which is traditionally a high risk, low yielding sector for financial institutions to service.
Worldwide, many financial institutions share this vision, with banks and large enterprises connecting directly to technology platforms in order to offer financial services to small businesses in a way that is both cost effective and scalable. Through this partnership, banks are starting to automatically flag business owners when cash flow looks tight and offer financing to tide them over.
With a full set of historical audited numbers at the fingertips of bankers and an accounting professional there to review the numbers each day, lending to a small business becomes less of a risk.
But until the financial web becomes more readily available, how do you know when it’s the right time to take money and at what price? The short answer is, consult your advisor. They’ll be able to give you the best answer as to when you should take money or not. A good rule to follow is the best opportunity to access capital is when you’re confident you’ll be able to achieve a return above costs of debt.
If there’s less confidence in that investment return, more extensive financial modeling may be needed in order to determine risk versus reward. The fewer risks a business owner takes, the better.
By keeping an eye on your cash flow and discussing lending with your advisor, even when business is good, you’ll be able to ease those rate rise worries.
Adjunct Professor - Applied Value Investing at Columbia Business School
7yNice work.