After a couple of years sitting stagnant at 3.25 percent, the prime interest rate is expected to go up in 2014, making this a good time to secure a business loan.
“There’s not a lot of inflationary pressure yet. The Federal Reserve has been signaling a desire to come off of quantitative easing, and they’ve been trying to set the market up for rate increases. But every time it’s mentioned, the stock market drops 100 points,” says Michael Hengl, senior vice president and group manager of Corporate Banking at Bridge Bank.
Eventually the expectation of higher interest rates will be set to the extent that the impact to the stock market will not be that great, and the rates will go up, Hengl says.
Smart Business spoke with Hengl about the state of the commercial banking industry and what’s in store for 2014.
How substantial will interest rate increases be in 2014?
Rates will start easing in the second half of 2014, but we’re not going to see big jumps.
Some sectors of the economy are doing very well. The Bay Area is dominated by technology companies that are going gangbusters right now. The energy industry is doing very well in places like Texas and North Dakota. However, there are still elements of the economy that are struggling.
That’s what makes it a good time for a small or midsize business to get a commercial loan. Right now, there is a lot of liquidity in the banking system, and banks want to make those loans. There just is not enough demand.
Is that because businesses are reluctant to increase debt?
Business managers are being very cautious. When it comes to hiring, they are taking it to the point where they’re maximizing the people they have on hand. Or if they’re buying equipment, it’s all replacement items. There’s been a decent amount of equipment financing, but it’s for capital expenditures that companies deferred in 2009, 2010 and 2011. They’re catching up with those needs.
Businesses are not buying equipment for expansion; when that happens, that’s when interest rates will start climbing.
Will anticipation of interest rate increases spur activity early in 2014?
Many commercial loans are variable-rate, so they’re much less rate sensitive. If you need a line of credit for inventory, you get the loan. However, equipment loans may have fixed rates, which you want to get at the lowest possible rate, and there have been more commercial real estate acquisitions.
One deal earlier this year was done solely because long-term rates were creeping up. Back in early summer, there was a big jump in mortgage rates.
Other than rate, are there advantages to getting a loan now?
Sure — when a company approaches a bank for a loan, they’re going to find the bank very receptive. Still, there were lessons learned from the financial crisis, and banks will exercise additional due diligence. That’s an advantage to business owners because it improves communication between the bank and the borrower, which is the cornerstone of a banking relationship.
A good example of how businesses can be helped by this process involved a company in the food industry, which had strong growth, but profits were lagging due to a manufacturing operation overseas. It couldn’t close the facility because of the impact on liquidity, and an operating line of credit was needed to fuel growth. By understanding this, a bank could cover the short-term need, knowing the company would recapture that over the long term.
That’s why it’s important for a company to sit down with its bank, go through the due diligence process and not be frustrated if it’s more work than it was five years ago.
In another case, a client bought a much larger company, a risky proposition. The company had a strong set of projections and acquisition plan, which was actually strengthened by the bank’s due diligence process. Now, the bank’s comfortable with the deal, and the company has a better business plan in place.
The bottom line is that it’s important to be proactive in communications with your banker, so the bank can react quickly when you need help. Ultimately that good relationship should help mitigate risk for both parties. ●
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