How Will A Rise In Interest Rates Effect Business Owners?

How Will A Rise In Interest Rates Effect Business Owners?

Things That Traditionally Increase When the Fed Increases Interest Rates

 

The recent rise in the Fed funds rate will likely cause a ripple effect on the borrowing costs for consumers and businesses that want to access credit based on the U.S. dollar. That has an impact across numerous credit categories, including the following:

  • The Prime Rate: A hike in the Feds rate immediately fueled a jump in the prime rate, which represents the credit rate that banks extend to their most credit-worthy customers. This rate is the one on which other forms of consumer credit are based, as a higher prime rate means that banks will increase fixed, and variable-rate borrowing costs when assessing risk on less credit-worthy companies and consumers.
  • Credit Card Rates: Working off the prime rate, banks will determine how credit-worthy other individuals are based on their risk profile. Rates will be affected for credit cards and other loans as both require extensive risk-profiling of consumers seeking credit to make purchases. Short-term borrowing will have higher rates than those considered long-term.
  • Savings: Money market and credit-deposit (CD) rates increase due to the tick up of the prime rate. In theory, that should boost savings among consumers and businesses as they can generate a higher return on their savings. However, it is possible that anyone with a debt burden would seek to pay off their financial obligations to offset higher variable rates tied to credit cards, home loans, or other debt instruments.
  • U.S. National Debt: A hike in interest rates boosts the borrowing costs for the U.S. government and fuel an increase in the national debt. A report from 2015 by the Congressional Budget Office and Dean Baker, a director at the Center for Economic and Policy Research in Washington, estimates that the U.S. government may end up paying $2.9 trillion more over the next decade due to increases in the interest rate, than it would have if the rates had stayed near zero.

Things That Are Largely Unaffected When the Fed Increases Benchmark Interest Rates

  • Auto Loan Rates: Auto companies have benefited immensely from the Fed’s zero-interest-rate policy, but rising benchmark rates will have an incremental impact. Surprisingly, auto loans have not shifted much since the Federal Reserve’s announcement because they are long-term loans.
  • Mortgage Rates: A sign of a rate hike can send home borrowers rushing to close on a deal for a fixed loan rate on a new home. However, mortgage rates traditionally fluctuate more in tandem with the yield of domestic 10-year Treasury notes, which are largely affected by inflation rates.

Things That Traditionally Decrease When the Fed Increases Interest Rates

  • Business Profits: When interest rates rise, that’s typically good news for the profitability of the banking sector, as noted by investment giant Goldman Sachs. But for the rest of the global business sector, a rate hike carves into profitability. That’s because the cost of capital required to expand goes higher. That could be terrible news for a market that is currently in an earnings recession.
  • Home Sales: Higher interest rates and higher inflation typically cool demand in the housing sector. On a 30-year loan at 4.0%, home buyers can currently anticipate at least 60% in interest payments over the duration of their investment. Any uptick is surely a deterrent to acquiring the long-term investment former President George Bush once described as central to “The American Dream.”
  • Consumer Spending: A rise in borrowing costs traditionally weighs on consumer spending. Both higher credit card rates and higher savings rates due to better bank rates provide fuel a downturn in consumer impulse purchasing. (For more, read How Interest Rates Affect Spending.)

Business Loans And Knowing The Right Mechanic

Business Loans And Knowing The Right Mechanic

Huntington Beach, CA: My trip to the mechanic made me think about why it is important to have a business loan broker in your corner.

My car recently started misfiring and I took it to the local, large regional mechanic shop (name held anonymous out of professional courtesy) to have them take a look at it. This particular mechanic occupies a lot of space in a high rent district, offers coffee and cookies in the waiting area and an overall professional and sterile atmosphere. The mechanic bays where the specialists operate and solve problems for sick cars looks like it was created by Boeing itself.

After the expert diagnosis was delivered (my car needed new spark plugs and two ignition coils replaced) they provided the cost estimate. I thought to myself, “this is going to be steep” and I wasn’t disappointed. Total cost $682.17. Seeing that I need my car and can’t go more than a few hours without it, I reluctantly agreed. Their courtesy shuttle drove me home and would later pick me up.

When I returned to the shop, the mechanic came out and said, “your car is all done, but you really should replace the other ignition coils and your timing belt is showing cracks and can break at any second.” He went on to say, “the timing belt is a big expense costing roughly $1,200 and then of course the cost of the other coils would bring use to around $1,800 with labor.” I said I would bring it back as I needed to pick up my kids from school.

As I was driving to my kids’ school, my head still in a fog having gone through the surreal experience of knowing that you are not getting the whole story, but not having the knowledge to know for sure, I remembered my trusted Volvo mechanic. I went to this fancy mechanic because they can service the car the same day and I was in a urgent need to have my car back. Now that I had the time, I called my Volvo specialist and booked an appointment.

He replaced the timing belt and also took care of some other minor repairs that weren’t urgent but nice to have done (one of running lights was out, there was a slow leak in my right front tire, and an issue with the passenger side door handle). The short story was that all these repairs had a total cost of $365.00! This was the timing belt that was going to cost me $1,200 according to the fancy mechanic. By the way, the other engine coils didn’t need to be replaced and if they happen to misfire, you can take the car in at your leisure within 100-200 miles of running the car like that. Quite a different story than the high priced mechanic gave me.

Where am I going with this? I saved a few bucks and that is a great win for me personally, but what does it have to do with securing capital and business loans? A lot actually. You see, the high priced guys would never tell me about their competitor working out of a little industrial box charging 1/3 the cost. They would never tell me that replacing the other ignition coils wasn’t necessary (on the contrary, they urged me to). I saved a lot of money by remembering who else was out there, offering similar service and quality work for less.

Business owners in the market for equipment loans, purchase order financing, SBA loans or any other type of loan often enter the process blind. This exposes them to being taken advantage of and subject to convincing, yet biased, opinions of how to handle their funding needs. Direct lenders are experts at explaining the benefits of their financing, but would never tell you where to go to get a competitive quote.

As unbiased business loan consultants, we provide our clients with the confidence to explore their funding needs knowing that we, with our industry experience, knowledge and contacts, are working on their behalf. Do you know if you are about to pay three times more than you should? Is the loan structure being offered by your lender truly the best for your business?

Save yourself the time, energy and frustration of exploring your business loan options and leave it to us. We work with business owners and funding sources on a daily basis and have our fingers on the pulse of the debt markets. Give us a call and let us discuss your capital needs 714-719-8966

To your success,

Patrick Zazueta | Founder
Huntington Coast Capital, Inc.

Huntington Coast Capital Is Off To Its Best Start Ever In 2016!

Huntington Coast Capital Is Off To Its Best Start Ever In 2016!

2016 has started out in a full sprint for Huntington Coast Capital. Through the first four weeks of the year, we have secured $11,300,175 dollars in working capital business loans for our clients. This volume represents the fastest start of any year since our first full year in operation in 2011!

The loan mix was varied and breaks down as follows:

* $5,500,000 business loan for a distributor of private label pastas, spices, and mixes secured by the company’s accounts receivable and inventory.

* $3,200,000 construction loan for a ground up development project in San Diego, CA.

* $100,000 SBA loan for a product development firm.

* $500,000 business loan for a auto transportation company.

* $2,000,0000 business loan for an importer of suits and formal wear for men.

Huntington Coast Capital is pleased to have secured funding for these clients! In each case, the client was in need of a creative business loan to grow their business. The business loan options we brought to the table allowed them to realize the full potential of their company.

If your company could benefit from having a choice of business loan options to choose from, we would like to speak with you! We enjoy playing a small role in insuring that our clients succeed.

To your success!

Patrick Zazueta | Founder
Huntington Coast Capital, Inc.
714-719-8966