For businesses, navigating today's higher rates is as different from operating in the previous near-zero rate environment as swimming in an ocean during a storm is unlike wading in a pool: higher stakes and more risk.
"When it doesn't cost much to borrow money, there's often the sense that you can potentially make more money by borrowing more, since it will put more capital in your hands. In other words, the willingness to put on leverage is higher when the cost of that leverage is lower," explained Steve Wyett, BOK Financial® chief investment strategist.
Big-name companies like Apple, Disney and AT&T took that approach during the pandemic—borrowing money even though they already had cash on hand, so as to lock in near-zero rates by issuing longer duration corporate bonds.
The corporations that took on longer-maturing debt haven't been feeling the impact of higher rates on this debt because it's not due yet, Wyett noted. This is similar to homeowners who locked in low fixed-rate mortgages—they haven't been subject to the increase in mortgage rates.
"We’re hearing that some capital projects are being put on hold because the expected return isn’t enough to cover the projected cost of the debt."- Steve Wyett, BOK Financial chief investment strategist
Business owners looking forward to lower rates—but when and how low still unknown
However, most businesses are too small to issue 30-year corporate bonds.
"It's the smaller companies without access to capital markets that may be paying more interest on debt now because they likely had to take out floating-rate loans," Wyett continued. "The key question is if they borrowed money to do something with it—such as buying a plant or equipment—that's generating a higher rate of return than the cost of debt. Today, we're hearing that some capital projects are being put on hold because the expected return isn't enough to cover the projected cost of the debt."
And when projects are put on hold, it's often not just the company that's affected. Sean Kelly, a BOK Financial relationship manager, said he recently spoke with a commercial client—a civil engineer working largely with developers—about the higher rate environment. "Even a hold on interest rates increases would be a win for our clients," the civil engineer told Kelly. "A decline would make projects more attractive and would, therefore, lead to more building activity."
Other businesses are concerned that when the Fed does cut rates, as they're anticipated to do at least by mid-year, it won't be enough. Another of Kelly's commercial clients, a manufacturer of sealants sold to homeowners, has been experiencing the impact of fewer home sales, less remodeling and fewer people spending money on home repairs.
Lower rates would increase the number of "discretionary house moves," home repair and remodeling activity, which would be "positive for sales but not significantly different unless the rates dropped into the mid- to low fives (percent)," the client told Kelly.
The Federal Funds rate—the target interest rate range at which banks borrow and lend their excess reserves to one another—now stands at 5.25 to 5.50%, but the interest rates paid by consumers and businesses on their debt can be higher than that figure, although they move up and down with it. For example, the average interest rate for a bank loan to a small business ranged from 5.89% to 12.23%, as of the third quarter of 2023.
Employees' financial well-being also a concern
Additionally, some company leaders are worried about how well their employees have been holding up to financial stressors. For example, retirement plan sponsors are concerned about how much inflation has been impacting plan participants' monthly budgets and whether they'll take out a 401(k) loan to make ends meet, which has its downsides, said Melissa Lord, director of investment fiduciary and consulting services at BOK Financial.
So far, BOK Financial hasn't seen a significant uptick in 401(k) loans, based on current data, Lord noted. However, the potential for the number of these loans to increase is still "top of mind" for plan sponsors, she said.
To address these concerns—and help those saving for retirement—BOK Financial provides an online financial wellness tool, as well as in-person education, to StartRight retirement plan participants. "Financial wellness is not only retirement plan investing, it's also budgeting and setting financial goals. It's questions like: 'How do you handle debt?' 'How do you increase your savings?' 'How do you put yourself in a position to save?'" Lord explained.
Moreover, although it's important to stay informed of the current environment, the danger is in being too reactive, she cautioned.
"Be aware of what the opportunities are today, but don't let that take the focus away from your long-term investing. You have to think of your longer-term goals and what's going to work for you to meet those."- Melissa Lord, director of investment fiduciary and consulting services at BOK Financial
Current environment also an opportunity for some businesses
While the higher-rate environment has been challenging for businesses with short-term debt, it's been positive for those saving money in savings accounts, certificates of deposit (CDs), money market accounts and money market funds—all of which have been yielding higher rates than when rates were near-zero. "Now, savers are getting paid," Wyett noted.
"For companies that don't operate in a highly leveraged position, this is a much better environment for them."- Steve Wyett, BOK Financial chief investment strategist
And there are other ways that businesses can use the current environment to their advantage. For example, those that have liquid assets such as cash on hand may be able to buy illiquid assets (such as equipment) at a discount from businesses that need to sell those assets quickly to raise money, Wyett said. Some of Kelly's clients are using the current environment as an opportunity to win more market share from their competitors.
The key to using this environment to your business's advantage—rather than viewing this time period as just a challenge to get through—is having a trusted financial services provider by your side, so that you're considering all of your business's options and choosing the ones that work best for your unique situation, experts agreed.
Kelly encourages business leaders to build a multifaceted relationship with their financial services firm and to foster a close relationship with their banker. "If there's an issue, you have to be confident that you and your financial services provider are going to work through it together," he said.
Moreover, although it's easy to dwell on the challenges that higher rates can bring to businesses, including their employees, it's important to look for ways to better your company's position—no matter how much or how little rates drop, experts agreed.
In Wyett's words: "One company's difficulties can be another company's opportunity."
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