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Gene (00:02):
Hey everybody, this is Gene Marks. And welcome to this week’s Small Biz Ahead podcast, where I’d like to take something going on in the news and maybe give you some thoughts on it. And what’s been going on in the news. Well, interest rates has been going on in the news guys. I mean, two weeks ago, the Federal Reserve announced a 75 basis point increase in its federal funds rate. And if you don’t know what the federal funds rate is, join the club, neither did I. It’s basically the interest rate that banks charge each other to borrow or lend excess reserves overnight. So, I mean this, you know, fluctuations in this rate affects all interest rates across the banking system. So it should come as no surprise that since the announcement, rates for both consumers and businesses have increased. Let me give you an example.
Gene (00:50):
Okay. A 30 year fixed rate mortgage now averages 5.81% compared to about 3% a year ago. And the prime rate charged by financial institutions like I’ll use like Bank of America as an example. That by the way, the prime rate is the interest rate that banks charged to their best customers. Bank of America’s prime rate is now at 4.75% compared to 3.5% as recently as March. So obviously interest rates are rising and many economists think rates are gonna continue to go up as the Fed battles, both inflation and a slowing economy, listen for small businesses like mine or yours. All of this means higher cost to maintain debt and borrow additional funds. It may also potentially result in less capital available for us, right? So what do we do in this area of, we’re in this sort of era of rising interest rates?
Gene (01:46):
Well, I got some suggestions for you. For starters, we need to be making sure we’re paying down our credit card debt and any other higher interest loans that have variable rates. The interest on this debt could become very costly. If you’re able to pay down these loans, these high rate loans, then do it. Even if that means converting that debt or portions of it to longer term loans with fixed interest rates that you might have to pledge collateral for. Do it because those interest rates could become pretty debilitating. I mean, rising debt service costs, it can be a material and unexpected hit to our cash flow. Preparing for this now is really crucial guys. So, if you haven’t looked at the terms of your loans recently, now is a good time to do that. If you need financing, you’ll find the best rates and the best chance of approval with either the government back section seven A and 504 loans that are offered by lenders approved by the Small Business Administration. Also, you might want to take advantage of the State Small Business Credit Initiative. It was a 10 billion dollar program, thanks to the 2021 American Rescue Plan Act. That money is being given out to states…
Gene (02:58):
You wanna reach out to your state about this because the states are then taking that federal money and giving it out to community banks and lenders and community organizations. I’ve talked about this on a previous podcast. Find out, Google your state and their involvement in The State Small Business Credit Initiative. You can get some very competitive loans with easy approval that way, or even grants or other types of equity investments. Interest rate increase is gonna increase your cost of borrowing. But there is a silver lining. It’s gonna also increase the potential income that you make if you manage your money wisely. So, you know, savings rates aren’t significantly rising just yet, but they will. Talk to your banker and set up higher yield checking or money market accounts and start sweeping any excess cash there.
Gene (03:46):
Consider putting any cash you don’t need for six months or a year into FDIC insured certificate of deposits, which generally pay higher interest, but lock up your funds for a period of time. Also consider U.S. treasury bills because the short term, at least in the short term, because the three month U.S. treasury ended this past week at about 3.35%. It hasn’t been this high in like 15 years. So even though inflation is still a lot higher, it’s still a good place to put your money for the short-term until other interest rates start picking up. So think about that. Treasury bill’s something definitely to consider. Listen, if you’re willing to take a little bit more risk and you wanna invest for the longer term, you might wanna also consider moving your excess cash to mutual funds, which invest in blue chip dividend paying equities, which have historically proven to outpace interest earnings.
Gene (04:39):
Many of the experts I know are advising their clients to rebalance their accounts, so you buy these blue chip dividend yielding companies. Just be careful because again, you know, some of these, the markets are still very volatile, but long term, it’s a good move to do that to stay ahead of interest rates. By the way, while we’re on the topic at cash. We should all be doing our best to manage it better. I mean, we know that, right? So I mean, stepping up our credit and collection activities to ensure that any open receivables we have, aren’t outstanding more than 30 days or even less, if possible. The longer your invoices stay open, the less interest we’re receiving our money. I’m advising my clients to try and take advantage of any supplier discounts for early payment. As oftentimes these discounts may earn more than interest, a bank is paying. I mean, in the end, you want to talk to a financial advisor about all of this, cuz it’s complicated. But just bear in mind and as just a recap, get rid of that high interest debt, turn it into fixed longer term loans, collateralize it, if you can.
Gene (05:39):
Look to the Small Business Administration or to The State Small Business Credit Initiative or government backed loans and financing of better interest rates. Sweep excess cash into interest bearing accounts or buy things like treasury bills, at least for the short term, certificate deposits…
Gene (05:57):
Buy equities that pay dividends and blue chip equities. These are all moves that people are making to make sure that they’re just managing their cash better through these times of higher interest rates. So I hope I’m getting everything. If I’ve forgotten anything, let me know. You can get other advice and tips and help for running your business at the Small Biz Ahead website. That’s SBA.TheHartford.com or SmallBizAhead.com. So thanks for listening. My name is Gene Marks. I will be back with you in the following week with some other tidbit in the news and some thoughts on how you can manage your way around that to make sure you’re getting profits and growing your business. Thanks for listening. See you again very soon. Take care.
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