As the Federal Reserve continued to raise interest rates throughout 2018, many companies decided to lock in their loan rates with an interest rate swap. This is a way for a company to secure a fixed interest rate rather than have a floating rate on its loans. By locking in interest rates for an extended period, a company can reduce its exposure to fluctuations from rising rates in the years to come.
Interest rate swaps are typically most effective for companies that take out long-term loans – think five, seven or 10 years – in large amounts, usually more than $3 million. They are a useful tool when a company wants to hedge risk on loans over a longer term, but they are not the only option businesses should evaluate when reviewing their financial resources.
Here are three additional considerations:
1. Evaluate your remaining debt.
An interest rate swap may not be appropriate for all of a company’s outstanding business loans. For instance, it might be beneficial to utilize a floating rate on some loans where you can hedge rates appropriately and strategically. A floating rate, otherwise known as a variable rate, means the interest rate can change over time depending on the market environment. There is some risk involved with a floating rate because as the market fluctuates, you could end up paying more on your business loans. The flip side is that if the rates across the market decrease, your business could save money.
Another option is to select a fixed rate for debt. This can allow for easier financial projections and planning, as the payment will stay the same every month until the debt is refinanced.
Be sure to work with your financial team to evaluate the best structure for your debt. Sometimes when you crunch the numbers, a fixed rate can end up costing more than a floating rate.
2. Reduce costs and risk with a payables solution.
Different payable solutions, such as automated clearing house and ghost cards, can help manage costs more effectively. Paying your vendors through ACH can improve efficiencies and decrease your business costs, all while reducing risks associated to checks. Electronic payments are not only more efficient, driving down cost per payment, but also they reduce transmission of checks that contain your account information, check range and a sample of your signature, which anyone can easily use to commit fraud. In addition, a ghost card can significantly reduce fraud much like ACH but adds the additional benefit of up to 55 days of float to your payables and a rebate associated to the payments made on the card.
Commercial card payables are a great addition to your financial toolkit. A strategic payables solution can help your business streamline third-party vendor management and offer enhanced efficiencies for risk reduction and cost savings.
3. Update your business exit plan.
While you are taking the time to evaluate the company’s debt and streamline processes to reduce risk and costs, you also can update your business exit and succession plan. For most business owners, their company is more than a job – it is personal and an important part of their overall life.
A business exit and succession plan can help reduce risk and tension, as the next steps are clearly outlined and agreed upon by all parties involved. When the time comes to sell or explore the next chapter for the business, the process can be very stressful for the owners and employees. Having a solid succession and exit plan will help manage the emotions involved and pave the way for the company’s successful future.
Ultimately, when you take the time to utilize a new financial product, like an interest rate swap, it is also smart to evaluate your business through a holistic lens. What are you missing? What other products or financial resources can help you become more efficient, cost-effective and relevant to your customers and vendors?
Regular communication with your financial team will help ensure you are aware of all the best options and strategies to remain profitable throughout the various life cycles of your company.
Byron Pierce is a senior vice president and commercial loan officer for UMB Bank in Springfield. He can be reached at email@example.com.
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