Now or Later: When Is the Best Time to Borrow?

Interest rates have been extraordinarily low for the last 10–20 years, giving a generation of business owners confidence in their ability to repay loans to grow exponentially and operate more efficiently.

That may, however, change soon. The Fed has indicated that interest rates will likely go up in the near future. Some analysts estimate a significant increase.

When making decisions about new equipment, business expansion projects, or modernizing processes, you have three choices:

  • Take out a loan
  • Use existing capital (i.e., cash on hand)
  • Choose to forego an expenditure temporarily or permanently

Unfortunately, there’s no rule of thumb when it comes to borrowing versus spending cash versus waiting. There are pros and cons to each scenario. 

If you choose to borrow now, you know what you’re getting by locking in an acceptable – perhaps even exceptional – rate before the market changes. However, rates may not go up, or they could even fall further before the market changes.

If you reinvest existing capital, you don’t need to worry about interest at all. However, this approach takes away your “cushion.” The last few years definitely exposed the risk of operating on a too-lean basis to cover unpredictable cash flow.

The benefits of waiting include no worries about added debt during the waiting period, and the potential for a lower rate down the road, if interest rates drop. That said, waiting means you could potentially limit growth or miss opportunities. Plus, rates may be even higher down the road.

The real answer lies in understanding your company’s overall financial picture.

7 Ways to Find Your Answer

The best way to determine the right time to borrow is to examine the status of your business and your own leadership style in the following key areas. While these tips can’t ensure success, there are steps you can take to help improve your odds:

  1. Solidify Budgets and Projections. It will be easier to make this decision if you have a detailed budget and feel confident in your projections for the next one to five years. Understand where your money is coming from and where it is going. Use historical data to help estimate future growth.
  2. Analyze Cash Flow. Many businesses have cash-flow cycles, with a busy season and a slow period. By understanding this seasonality, you can avoid overcommitting cash on hand that you will need later on to even out these cycles.
  3. Determine Duration of Debt. The shorter the loan terms, the easier it will be to predict your need and ability to pay back debt. Most commercial loans will only lock in rates for five years, even if they will amortize over a 20-year timeline. What is your plan if rates go up when your loan matures for renewal?
  4. Understand Your ROI. What will this investment give you in return? If you buy that piece of equipment, what do you need to happen for that piece to be profitable? Is that a realistic expectation? 
  5. Be Realistic About Risk Tolerance. Understand your own level of risk tolerance. Can you be level-headed about your options if something changes, or will panic set in and affect your management style? On the other hand, some leaders are motivated by a challenge.
  6. Tap into Trusted Advisors. Now, more than ever, it’s important to develop relationships with the people who want to help you succeed. Treat your business banker, accountant, and CFO like partners, rather than gatekeepers. The more we understand your business as a whole, the better we can be at asking the right questions to help guide you through the decision-making process. Every banker can provide you with a term sheet, but a banker who understands your business goals and personality will have a better perspective on what types of things influence your company and your industry. Remember, we work with a lot of companies and have experience in determining loan success.
  7. Be Aware of the Current Financial Environment. Being aware of the trend for higher rates is half the battle. It means you won’t be taken by surprise and can plan for these changes proactively.  

Experts predict that interest rates will likely rise, but you don’t have to accept that fact from a position of weakness. By anticipating this change and preparing yourself with options, you can be proactive in your approach and give yourself time to adjust accordingly. 

Contact any of our business bankers to discuss whether this is the right time for your company to borrow.

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