How Your Business Can Take Advantage of Rising Interest Rates

How Your Business Can Take Advantage of Rising Interest Rates

 

The Federal Reserve kept busy this year: In December 2017, the central bank voted to raise benchmark interest rates to a range between 1.25 percent and 1.5 percent — the third short-term interest rate increase in 12 months. If the economy remains healthy, it is likely more rate increases are coming. Multiple rate increases are expected in 2018.

“With interest rates so low — in some cases approaching zero — the returns on bank accounts and even alternative short-term investments were relatively low,” Fifth Third Senior Vice President and Deposit and Treasury Management Director Doug Robertson says. “As we enter this rising interest rate environment, now there are new opportunities and challenges.”

After the 2008 financial crisis, the Fed slashed rates to entice more borrowing. Now the short-term cash management landscape is shifting. Rising rates mean two things for cash managers and funds for their business: The cost of short-term borrowing and the opportunity to earn better returns on excess funds will go up.

Robertson advises cash managers to take the following steps to leverage rising interest rates:

Revisit your cash management strategy

For a decade of low, unchanging interest rates, you perhaps haven’t felt the need to make many adjustments to your cash management strategy. But in light of rising rates and recent regulatory changes, maintaining the status quo isn’t really feasible any longer. Most corporations can now earn interest on checking accounts, which is a big change - it means idle funds can now offer a return. It also becomes more important to understand what floating rate debt you have and the impacts the rising rates have on costs. 

As we start the new year, now is the ideal time to revisit the opportunities and challenges for your business in the rising rate environment.

Leverage short-term investment strategies

 In addition to earning interest on checking accounts, there are other ways cash managers can leverage higher rates. Higher interest rates potentially create an opportunity to earn bigger returns on your excess funds. While you may choose to invest those funds back into your company or continue to allow the funds to offset fees, you may also want to pursue short-term investments.

After all, if the Fed is likely to raise interest rates again in 2018, you may have the opportunity to re-invest those funds at a higher rate. This is preferable to locking your excess funds into a long-term investment at a lower interest rate.

Explore the following short-term strategies to earn the highest return on excess funds.

  • Interest-bearing checking accounts
  • Hybrid checking accounts
  • Certificate of deposits
  • Money market deposits
  • Money market mutual funds

Consider your debt and excess funds side-by-side

Often we think of debt and excess funds separately. Robertson, however, recommends a holistic approach. 

“Now is the time to consider: What does this mean for excess funds and my debt situation? How can I blend those two to maximize my return and minimize my costs?” he says. 

Roberston advises cash managers to seek out strategic opportunities relating to interest rates over the next six months. Make adjustments to your approach so that both the debt and investment components complement each other.

Create a new strategy with your Relationship Manager

If you’re unsure of what makes the most sense for your business, reach out to your Relationship Manager, who—while taking into consideration your business goals and the rising interest rate environment—can help you formulate a smart, deft cash management strategy for the next 18-24 months.

Looking into 2018, proactive cash managers should keep a close eye on news regarding rate hikes. “Look not just for immediacy in rate movements, but the long-term strategies for your company,” says Robertson. He encourages cash managers to think about where they want their business to be in two or three years, then tailor their strategy to those objectives.

This article was written by Fifth Third Bank.

The views expressed by the author are not necessarily those of Fifth Third Bank and are solely the opinions of the author. This article is for informational purposes only. It does not constitute the rendering of legal, accounting, or other professional services by Fifth Third Bank or any of their subsidiaries or affiliates, and are provided without any warranty whatsoever.