How do Interest Rate Hikes from the FDIC Affect You?

By January 14, 2019Uncategorized

As the economy seems to have largely recovered from the financial crisis of 2008, interests rates are no longer at near-zero or low numbers for credit. Instead, the Federal Deposit Insurance Corporation (FDIC) has been steadily hiking up interest rates over the past couple of years, which means that companies should rethink their financial decisions in light of rising rates. These increased rates don’t necessarily present an immediate threat to corporations, and there are ways that companies can benefit from the hikes.

After the interests rates dropped, many companies took advantage of the low rates and took on liabilities and issued debt securities. Corporate debt continued to rise steadily for years. However, companies were largely using the new debt to refinance old debt or purchase back equity shares at lower rates and not to expand or improve operations with new equipment and technology. This type of debt tends to have a longer maturity, so rising interest rates likely won’t have much of an effect on companies who took this path.

However, now that rates are increasing, many companies are taking on more short-term debt instead of long-term debt. This means financing software, hardware, and other equipment to make operations as efficient as possible and stay hyper-competitive in the market.

Don’t Let Higher Rates Scare You Away from Financing

Higher rates may convince some business owners that it is better to pay cash for equipment and technology instead of financing at an increased rate. However, we’ve discussed before on this blog the opportunity costs of paying cash for technology. Some of the benefits of taking on short-term debt can include:

  • Tax benefits – While paying more interest may seem like a bad thing to many corporate owners, always remember the interest payments will reduce your overall taxable profits, often giving you a significant tax break.
  • Greater liquidity – Purchasing technology or other equipment outright can be a large cash expenditure. As a result, you may have to temporarily scale back operations, expenses, or inventory due to a lack of cash flow. For newer companies, a lack of cash flow can mean turning away orders or cutting significant expenses, as there may not be reliable revenue coming in yet to cover the large purchase. Financing your technology can prevent any cash flow problems.
  • Easier upgrades – Technology is ever-changing and ever-improving. A large technology purchase outright can result in owning obsolete technology that has highly depreciated in only a couple of years. If you finance or lease your technology, you can prevent losses due to escalated depreciation and upgrade easily.
  • Hidden costs – When you make a purchase, you likely think about the immediate outlay only. However, once you spend a lot of cash, you may then face costs of repairs, upgrades, and more. If you finance the technology, you will have a lower monthly payment and will have the cash to dedicate to repairs and other hidden costs.

Companies shouldn’t let higher rates prevent them from financing software and hardware.  Blue Street can show you how financing your equipment will save you capital and make you more profit…even when the FDIC raises rates.

Contact Blue Street Capital online to discuss your options today.