Financial well-being June 10, 2022 By
Record low interest rates have fueled more than an economic recovery. The economy is now booming with inflation recently eclipsing 8%. Last month, the Federal Reserve took a step toward curbing inflation by raising the central bank’s benchmark federal funds rate. The goal of the increase in borrowing costs is to ease the economy off the gas pedal.
While the first lift was a modest 25 basis points (0.25%), there are six more rate hikes expected before 2023. “Between 2015 and 2018 the Fed raised rates nine times before rates started going down again.” said George Clark, CFO of First United Bank. “Between 2004 and 2006 we saw 17 hikes before rates declined.”
As rates increase, the cost of borrowing money will look different. This is not to say that financing new projects and purchases will become unaffordable, but the timing may need to be adjusted forward to get financing in place before the projected rate increases. “We are already beginning to see competitors increase their loan rates.” said Clark. “Banks are trying to balance between adjusting to a rising rate environment and staying competitive.”
Business owners need to continually plan and adjust to changing market conditions. Interest rate changes are one of those market conditions. Consider the cost of borrowing now versus what it will look like after rate hikes take effect closer to the end of the year. Depending on the project or purchase, this cost could be crucial to a business’ expansion plans.
“What business owners need to remember is that when the Fed starts moving rates up, it can be a long time before they start moving back down.”
—George Clark, CFO of First United Bank
Preparing for the Future
Nobody can control nor predict where interest rates will go during the remainder of 2022. But what business owners can do is stay prepared, know what’s going on, and be flexible. “I had been sitting on a dream for quite some time to open a gym in my community. What nobody told me was when the door opened it only stays open for a short amount of time.” said Kayl Bryant, owner of Empire Jiu-Jitsu. “Without the help of our banker being an advisor, I am not sure how we would navigate or be where we are today opening in a couple of weeks. Sometimes that small adjustment is the 'make it' point to a small business owner.”
Whether your business journey started 25 years ago or last week, rising rates can affect all stages in your journey. “These are interesting times.” Clark added. “Be sure to work with experts and bankers you trust who understand your local market, your business, and your unique needs.”
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