It’s a good time to borrow, but let prudence be your guide

There has been very strong borrowing demand and activity across banking institutions recently, says Bill Schumacher, senior vice president and market leader at Westfield Bank.

“When I talk with other bankers, it seems they’re all chasing deposits to fund loans,” he says. “Borrowing demand is strong and consumer confidence is high.”

That’s a welcome change coming out of the Great Recession, which had a terrible effect on the finances of people and businesses. Since then, confidence has returned and that’s led, especially in the past few years, to a loosening of the purse strings.

While optimism is high, there is uncertainty regarding the future, which has some businesses tempering their approach.

Smart Business spoke with Schumacher about borrowing strategies in a high-confidence market.

What are the trends in the market that are affecting businesses’ current outlook?

The positive effect of the current borrowing environment is that confidence and optimism are prompting businesses to make needed investments. Many consumers, borrowers and businesses have learned from the last recession that to weather any future economic turbulence, they need to be more liquid and significantly reduce indebtedness.

Confidence is undoubtedly high, but it’s contrasted somewhat with apprehension. Enthusiasm has been tempered by tariffs, which are driving up costs for some businesses and creating uncertainty. There’s also the thought that the U.S. is overdue for a recession, which some are forecasting could manifest in 2019.

How is this outlook affecting borrowing trends?

Businesses are acting with cautious optimism. Demand for debt is strong, but borrowers are approaching things with a little more prudence than in the past.

There’s a tendency for companies to be more liquid and take more time to make capital purchases. They’re also deleveraging to improve their cash position.

There are investments in new equipment and expansions, but companies now tend to use cash for those transactions. This is an effort to keep their liabilities lower, reducing their risk and keeping their balance sheets strong.

Companies are also borrowing from their owners or principals as they pursue expansion. Because there is currently more personal cash in companies, what’s being earned on deposits vs. what would be spent on loans make it, in some cases, a better decision to put that money directly back into the company. Borrowing is still a good option, but many companies are in a position to use cash because the yield on the reserves they’ve built over the years is ample.

The interest rate environment is also getting more attention as the Federal Reserve continues its trend of incremental rate increases. This is influencing some to lock in rates through longer-term fixed-rate products and forgo floating rates. Borrowers that have loans maturing or rates that are adjusting are looking to address that now rather than later as many expect that rates will be higher.

What should companies consider before taking on debt to fund projects?

Long-term fixed-rate debt is a safe bet at the moment as it offers some protections from a cash flow standpoint. However, companies considering borrowing should be wary of rising costs in the market associated with the labor shortage and material costs. It could be more expensive to build or buy a building than before, and that could mean those costs won’t translate into value. Closely evaluate any major expenditures with CPAs and financial advisers to determine the risk vs. reward.

In general, market trends are moving in a positive direction, but there is good reason to be cautious. Companies can insulate themselves by building cash reserves and not over leveraging. Keep an eye on the market, particularly on the aspects that impact the business directly. By avoiding the mistakes of the past, companies should be positioned to weather a recession, should one come, better than the last time.

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