While rising interest rates are generally meant to curb inflation by reducing economic activity, some businesses may want to follow an age-old maxim: "Time waits for no one."
"When business owners have urgent but lasting opportunities and need to expand their facilities, equipment or services, many are eager to secure the funds and 'seize the day,'" said Carla Harry, a Bank of Oklahoma business banker. Her clients, often in the manufacturing, construction, professional services and skilled trades industries, typically have up to $5 million in revenue.
The higher cost of money may appear daunting to a prospective borrower, but what Harry sees from clients is a "here-and-now" mentality. The opportunity at hand drives decisions, along with the flexibility to later refinance the loan or pay it off early.
"They believe that not only will the returns on investment outperform the lingering increased rates, but that in time, they may be able to shorten their loan term or reduce the projected borrowing costs otherwise," she said.
Harry recalls one instance when an at-capacity daycare provider seeking to grow her business had a timely and fortuitous opportunity to acquire a neighboring building that unexpectedly came on the market.
She borrowed to stay and grow, rather than relocate to another locale, believing that new revenue from expansion would exceed the additional financing costs in both the short and long term.
"She couldn't wait for rates to go down," Harry said, adding that the owner smartly negotiated the property purchase price to counter the loan rates.
In another case, a construction contractor who had hired sales staff to build his business found himself with potential customers that he could not serve due to the limitations of his on-hand equipment. Accordingly, he borrowed to acquire capacity-increasing machinery.
In both examples, neither client felt the interest rate was a barrier in moving forward. Instead, they calculated the prices they charge their customers—and the time needed to achieve loan-payback ROI—based on the costs they are incurring. According to Harry, that's how clients see business getting done: when there's a need to be filled, the market will adjust.
“When the customer has an immediate business need, the rate becomes secondary.”- Carla Harry, business banker
What a difference a year makes
Many borrowers have not experienced the current rates in years, and some never have. They're much more accustomed to near-zero rates, which prevailed from late 2008 through late 2016 and then again during the COVID pandemic. Now the Federal Funds rate is at a range of 4.75% to 5%. And it may go even higher—a situation not seen since July 2007.
Although the rate affects the cost of borrowing for consumers and businesses, it's not the only factor. The loan type, lender, borrowers' qualifications and collateral can all influence an actual loan rate. In fact, a lending rate of 0.50% more than the federal rate is common for traditional business loans. And fees can raise the overall APR, or the annual percentage rate, influencing the borrower's decision-making.
Consider the year-over-year differences to borrow $25,000 for 20 years at then-current rates.
- For a March 2022 loan with a rate of 0.75%, a borrower would pay $224 monthly in principal plus interest, and nearly $4,000 in total interest, over the 20-year loan period.
- For a March 2023 loan with a 5.25% rate (.50% added to the current 4.75% Federal Funds rate) the borrower would pay $337 monthly in principal and interest, and nearly $31,000 in total interest, over the 20-year period.
In Harry's experience, borrowers often don't see the rates as permanent. In fact, many are attracted to flexible terms that can include early repayment without a penalty.
She recently instituted a loan arrangement known as a "5/20." Under these terms, the payment is amortized over 20 years with a fixed rate for the first five years. Then, at the five-year mark, the borrower has to requalify and the rate may be subject to refinancing.
Meanwhile, borrowers are rightfully seeking more value for their added expense, and many lenders are providing operating efficiency opportunities, such as:
- Cash management or lockbox services that can accelerate business clients' deposit crediting or reduce their efforts to deposit customers' payments.
- Expedited payment by debiting their customers' bank account for accounts receivable (with two-party consent).
- Merchant services that enable digital and/or credit card payment processing.
- Introductions to internal commercial partners who can serve the client's larger needs, like a construction loan.
Harry, who has 11 years of lending, bank management and treasury services experience at Bank of Oklahoma, sees the current dynamic rate climate as one of several variables within a larger and constant business philosophy.
"Today's interest rates are part of a longer overall business cycle and a topic I discuss regularly with clients," she said. "We always want to help our business clients succeed, and we can get creative and resourceful to do so. That part never changes."