- September 19, 2013
- Posted by: Paul Foster
- Category: Small business financial help, Strategic planning advice
Depending on how much debt your business carries, your exposure to changes in the interest rate could be high or low.
The best advice I can give about the future of interest rates:
Don’t believe the fortune tellers!
If your banker says, “ We don’t see interest rates rising for a couple years.” – Don’t believe him.
If the media makes a prediction – don’t believe them either.
How is it possible to predict the future? You can’t.
Two things you can do:
1) Hedge your interest rate bets.
If you have a line of credit in place, the interest on that typically changes with the prime rate of interest. This rate has been 3.0% since January, 2011. You can’t lock this rate in if you wanted to. Therefore, if you have a term loan and/or mortgage debt you could consider locking in the current rate to reduce the risk of interest rates increasing. This way you have a balance of variable rate and fixed interest expense.
2) Blend and extend.
This concept of blending and extending exist mainly for residential mortgages. If you are currently in a fixed rate mortgage but it is not due yet, you can consider doing a ‘blend and extend’. If you have 2 years left at 2.95% and the current rate is 3.59%, you can blend the two rates and get a new 5 year mortgage at 3.25%.
The benefit of this move is to eliminate your exposure to the risk of interest rate hikes for the next 5 years instead of only 2.
It is best to be proactive with respect to managing your interest rate risk, educate yourself and know your options. If you carry a lot of variable rate debt, it is worthwhile knowing what fixed rate options may exist for you. Even if the fixed rate is a little higher, you can purchase piece of mind and reduce your interest rate risk accordingly.