Inflation Protection: Manage Interest Rate Costs

In order to control the overwhelming increase in prices (aka inflation) the Fed will need to raise the fed funds rate. As defined by The Balance, “The fed funds rate is the interest rate banks charge each other to lend Federal Reserve funds overnight. The nation's central bank uses it in addition to other tools to promote economic stability by raising or lowering the cost of borrowing.”

Since late 2019, this rate has been on a decline. On March 15, 2020, the Fed lowered the rate to almost 0% on March 15, 2020 in an effort to boost the economy amidst the impending threat of the coronavirus pandemic. Today, the rate remains close to 0%. The Fed has indicated at least two, if not three, possible rate increases in 2022.

But how will businesses handle the increased interest rate, in addition to the increased cost of their raw materials and the demand for higher pay from employees (to compensate for inflation?)

Manage Interest Rate Costs

As mentioned earlier, rates have been extremely low since late 2019. In response, most businesses moved their lines of credit to a floating rate to take advantage of the lower carrying costs. However, the anticipated rate increases will dramatically increase carrying costs.

For example, $1 million line of credit at 5.5% will cost $25,000 per year.

With at least two rate hikes in the foreseeable future, Coveted Financial suggests moving a portion of your evergreen loan to a fixed rate loan to mitigate rate risk. *An evergreen loan does not require the repayment of principal during the life of the loan, or during a specified period of time.

Our team will work with your business to determine how much debt you should move to a fixed rate and what monthly payment amount your business can best afford. Additionally, we’ll help you negotiate the best rate, determine how long the loan should be, and provide a cash flow analysis to see the effect of the new loan.