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Rising Interest Rates and What It Means for Businesses

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Q&A with Centrust Bank CEO, Gerard Buccino

We are all feeling the pinch of inflation in our pocketbooks at the grocery store, gas station and everywhere. We are also experiencing rapid interest rate increases.

The Federal Reserve’s mission is to keep the U.S. economy humming — not too hot, not too cold, but just right. When the economy booms and “runs hot,” distortions like inflation and asset bubbles can get out of hand, threatening economic stability. That’s when the Fed steps in and raises interest rates, which helps cool down the economy and keep growth on track. During the pandemic, businesses got a lot of help from the Fed, but with interest rates rising – what does it all mean?

Rising interest rates can mean higher returns on savings. That’s the good news: Rising interest rates mean that the money you’ve deposited is now eligible for higher returns. The bad news is, the level to which those rates rise is left somewhat to the discretion of individual financial institutions. So, while you may see a higher return, there’s no guarantee you’ll see the highest possible rate out there.

Deposit management services can provide significant value. As a bank, we can spread your business’s extra cash around to a network of other banks to get the best possible return. It’s a valuable addition to your overall cash management strategy, particularly when rates start to rise.

We asked Gerard Buccino, CEO of Centrust Bank some key questions:

Do the rising interest rates mean higher debt payments?

Yes, If you have fixed-rate loans for your business, you’re in the clear and resting easier. However, if your loans have variable rates, the rising interest rate environment could lead to higher monthly payments. That not only increases your overall expenses, but it also poses a threat to your cash flow, which is critical for maintaining day-to-day operations.

If you are in a situation with a variable loan, have a conversation with your bank or lender to determine if there’s any flexibility in your rate increase. If you’re not able to fix the rate for a given period of time, there’s a chance you may be able to secure a smaller increase, at least in the short term.

How do the rate increases impact a company’s ability to grow?

If your business has big plans for growth, you may want to consider the impact rising interest rates will have on how much that growth will cost. If you will need loans to purchase a building or make another significant investment in your business, those loans will come with a higher interest rate, costing you more money over time. Those costs have a trickle-down effect, playing a role in determining your cash flow needs and other budgetary concerns. That said, rising interest rates shouldn’t necessarily postpone your plans for growth. In fact, higher rates are an indicator of overall economic strength. And in a strong economy, businesses generally do well.

Anything else you advise business owners with the current interest rate environment?

Rising interest rates can make short-term investment strategies more attractive.

Now is the time to explore the impact short-term investment strategies could have on your business. When interest rates are dropping, longer-term investment opportunities are sometimes more appealing as you can lock in rates before they drop. When rates are rising, however, short-term investment strategies become much more appealing as shorter commitments can offer the flexibility to take advantage of the higher rates as they rise. Investments such as certificates of deposit (CDs), interest-bearing checking accounts and high-yield business savings accounts are good examples of these short-term investments.

 

Disclaimer: We want to add on behalf of Centrust Bank that the information provided here is not investment, tax or financial advice. You should always consult with a licensed professional for advice concerning your specific situation.

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