Sue Baaden
Head of Business Banking
JPMorgan Chase & Co. in Orange County
Interest rates continue to be at historical lows, and it is expected that rates will rise with an improving economy. Our Chase business clients understand this and have taken advantage of lower rates and lower monthly payments by refinancing existing term debt or purchasing real estate and equipment. Lower monthly payments have helped borrowers free up cash to save or use for other business purposes.
According to the 2014 Chase Business Leaders Outlook Survey, 77% of California business owners are optimistic about their own companies’ performance, 68% expect sales to increase, and 61% expect profits to increase. The majority—67%—are considering borrowing in the next 12 months.
We’re delighted that lower interest rates have helped clients to feel more confident to expand and take on debt. This represents a big change from recent years, when many small businesses were reluctant to take on such risks due to the uncertain economy, worries about the Affordable Care Act, tax reform and ongoing budget talks in Washington, D.C.
Today, we have clients like a printing company in Buena Park, which obtained a $1 million loan a few months ago to buy two digital printers. For years, that firm had contracted out that service. The owner attributes his confidence to a hearty revenue stream.
We have another client in Anaheim focused on convention planning services. It opted to keep a variable rate on its commercial real estate loan rather than select a fixed rate at 3% higher. That business will realize more than $100,000 in annual savings on the payments. It plans to use the excess cash flow to pursue additional revenue opportunities for the business.
As interest rates remain low, Chase’s ability to offer both variable-rate and fixed-rate business loans provides clients with options to choose what is right for their specific business goals.
Steven Buster
Chief Executive
Pacific Mercantile Bancorp
All of our clients recognize that interest rates are going up. The only question is when. And it’s been quite awhile since businesses had to deal with the prospect of a rising interest rate environment. So we are getting a lot of business owners coming to us to help them figure out how to best manage the inevitable increase they will see in the costs of funding their businesses.
Most bank credit facilities are floating-rate in structure and extremely inexpensive in historical terms. As a result of their low cost, most companies have increased their use of floating-rate debt over the past several years. But overreliance on short-term funding will get very expensive in a rising-rate environment.
Timing the market is next to impossible. So even though rates haven’t increased yet, many of our clients have started to shift some of their floating-rate debt to fixed-rate debt, which is still extremely low from a historical perspective. To properly hedge their interest rate risk, many entrepreneurs are choosing to go halfway or financing 50% of their bank obligation into fixed-rate equipment loans or commercial mortgage financing.
For the slightly more sophisticated companies, we are seeing more utilization of interest rate swaps, which are a good tool for hedging against rising interest rates. By establishing a notional value that is appropriate for the amount of debt outstanding, the same interest rate risk can be covered without the fees and transactional costs of a new fixed-rate mortgage.
One thing we tell our clients is that when the shift in rates comes, rates can go up rapidly and make managing your debt costs unaffordable. Now is the best time to consider options.
Kevin Dunigan
Executive Vice President, OC Regional Executive
City National Bank
The changing interest rate environment is definitely a concern for City National clients, especially as it relates to their borrowing and investment needs. With all the talk about the Federal Reserve’s raising interest rates next year, a number of businesses are being proactive in placing long-term debt on assets that have similar holding horizons. Businesses are not only trying to anticipate when interest rates will go up next year, they’re also trying to calculate by how much they’ll increase.
A volatile interest rate environment clearly presents challenges for businesses and their budgeting and strategic planning process. Depending on the type of debt they have—fixed versus variable—their cost of funds will no doubt increase in a rising rate environment. However, some of those costs can be offset by higher yields on their deposit and investment vehicles. Rising or falling interest rates has always been a two-edged sword. Businesses that borrow in today’s low interest rate environment are certainly paying less on their cost of funds, while the yield on their deposits or investments are earning less than they did before the Great Recession. Conversely, businesses will pay more on their credit needs when rates go up, but they will also earn a greater return on their deposits and investments with higher rates.
It’s quite obvious that businesses are still facing some uphill battles and challenges in this uncertain interest rate environment. The key for businesses is to seek out those skilled professionals who can help them navigate through the undercurrents of uncertainty and an ever-changing business climate.
Alan Epperson
Senior Vice President, Business Banking
Orange County
Wells Fargo
Although business owner sentiment is absolutely improving, business owners are cautious, and many are reluctant to expand, particularly depending on the individual business, its financial situation and its sector. We are hearing from our economists that rates will remain low for borrowing. For some segments, the low rates have been a positive, including those businesses that support home construction, remodeling and home supplies. While there is little interest rate movement today, the first sign of an increase may drive activity in the short term as businesses seek to lock in lower rates for financing. For now, this is not a major concern of most businesses.
For our small-business customers, the ease of obtaining credit continues an upward trend. In the most recent Wells Fargo/Gallup Small Business Index survey, 32% of small-business owners said credit has been very or somewhat easy to obtain in the past 12 months—up from 25% in the second quarter—and 38% expect credit to be very or somewhat easy to obtain over the next 12 months. In that same survey, small-business owners were asked what the most important challenge is facing them today. “Attracting new customers” and “generating new sales” was the top challenge identified: 13%. Only 4% of business owners said credit availability was their top challenge. Credit remains a key factor in business and economic growth. While the economy is still working its way out of the recession, we have seen slow, steady growth, and credit is a key part of that. The recent volatility in the financial markets was a good example of the emotion and caution that still exists today.
Todd Hollander
Managing Director, Head of Business Banking
MUFG Union Bank
Union Bank’s Business Banking clients, like most business owners shopping for a loan, want to quickly lock in a competitive rate, and many are concerned about the fluctuating interest rate environment in general. We advise our clients to carefully study their balance sheet and needs for cash, along with their current debt schedule.
Careful analysis of the timing needs of their cash demands is very important in a potentially rising rate environment. It is wise to try to lock in debt that may not be retired in the short run with the current low cost of capital. During fluctuating rate environments, especially, business owners need to work closely with their bankers and look for lenders that offer the ability to lock in their rate to avoid interest rate fluctuation between need-identification and funding. Union Bank’s Business Banking group offers our prospective business borrowers the ability to lock their rate up to 90 days with a limited rate lock with no additional fee.
We also offer flexible short- and long-term financing options to meet business owners’ needs. Business owners should also keep an eye on macroeconomic events and headlines—federal government announcements, international events and monthly economic indicators, such as consumer confidence, employment report, and manufacturing indices—as a gauge of the health and direction of the economy.
Ivo Tjan
Chief Executive
CommerceWest Bank
A majority of our clients are very concerned about materially increasing interest rates in the future. They expect the Federal Reserve to raise rates soon. However, they are still cautiously optimistic about this economic recovery. Clients have requested longer-term fixed rates when inquiring about real estate or equipment financing. Businesses this year have also begun to aggressively borrow more than the previous year for expansion or capital expenditure to take advantage of the current low interest rate environment.
There is also a pattern this year of clients deploying their excess liquidity for investments rather than keeping them in the bank at the low interest rates.
In general, we noticed the sustained long-term low interest rate environment has finally made some business owners execute on their growth strategies to take advantage of the historically low rates while strongly believing that the current rate environment is not sustainable in the next several years.
Chris Walsh
Chief Executive
Sunwest Bank
At Sunwest Bank, interest rates have always been a major concern for our clients. Clients continually look to us to help them make decisions about how and when interest rates will change and ultimately how those changes will affect their business.
Today, the biggest challenge that our clients face is determining whether they want to purchase the office building or manufacturing plant today to lock in a fixed rate. They’re looking at the market and speculating when interest rates will rise or drop, whether they should secure an advantageous rate today, and if so, what that rate will be. Additionally, the possibility that the global economy will impact interest rates in the U.S. often has our clients wondering how actions or performance overseas will affect interest rates on their business here in Orange County.
The strategic timing and execution of obtaining an optimal interest rate can have a large financial impact on a company’s bottom-line profitability. Over time, we’ve generally seen our older, more mature clients opt to lock in their rates today. Conversely, our emerging business clients tend to lean toward adjustable rates, as they are often lower and afford them more flexibility in their cash flow.
Dan Wilson
Executive Vice President, Commercial Banking Group Area Manager
Bank of the West
Over the past five years, the interest rate environment in the U.S. has been very stable, which was one of the Federal Reserve’s goals when it started its quantitative easing program in 2008. For U.S. companies, stable interest rates have contributed to predictable cash flows, creating a secure foundation for decision making, planning and capital invest-ment.
Companies continue to capitalize on this stable backdrop, investing in everything from new machinery and equipment to new office space, retail locations, and distribution and warehouse facilities. At Bank of the West, this means we have been able to facilitate capital investment for our clients to help drive their growth.
After the Fed wraps up quantitative easing, some economists are expecting them to raise interest rates next year, while others are more concerned about deflationary pressures. Given the competing forces at play, it is difficult to predict whether rates will rise in the near future. If they do, we expect they would move modestly—and they would only be raised because U.S. economic growth is strong and sustainable enough to warrant it.
Our clients are aware of the possibility of rates rising in the coming months, and we are working with them to help mitigate risk related to any potential exposure. That being said, it isn’t a major concern impacting their investment plans, given today’s ideal setting for capital investment and reinvestment in business lines.
The international economic landscape is only reinforcing the relative appeal of the U.S. We are not seeing strong consumption in Europe, and Asia is facing a number of challenges, including questions about a potential slowdown in Chinese growth.
A common theme is emerging in light of this: Companies are looking to expand to the U.S. because it is a market that offers stability. As a result, we are seeing substantial capital inflows to the U.S. and to Southern California. The region is a unique microcosm with large ports that play a central role in driving overall U.S. economic activity. Many businesses headquartered here are significant providers of product throughout the Western states and elsewhere in the country. A number of thriving industries stem from this, including manufacturing, distribution, retail, construction, and real estate. As the U.S economic recovery gathers steam and discretionary consumer spending increases, we expect businesses in the region to keep benefiting from an environment that encourages investment and growth.
