Monday, November 29, 2021

Other People’s Money

Ask the CFP

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“Judge a man by his questions rather than his answers.” ~ Voltaire 

Question: What are your thoughts on taking advantage of the current low interest rate environment to consolidate debt and/or fund new projects? 

Answer: In recent months, this question has been posed by several business owners and entrepreneurs. For those with high creditworthiness, low interest rates may present an opportunity to consolidate existing debt or pursue new areas of growth. The federal funds rate has been called “the most important interest rate in the world.” This interest rate is the rate that banks pay for overnight borrowing, and it sets the stage for the prime rate and every other interest rate across the spectrum. From mortgages to credit cards, loans to car financing, the fed funds rate can have a powerful effect throughout the rest of the economy.

While you may associate low rates with easy borrowing, banks may start to restrict lending to small businesses or individuals in an effort to manage their long-term interest rate risk and reduce the number of loans they are writing. Banks also may lose deposits as people shift money into buying goods or services or paying off debt. Insurance companies rely on returns, so insurance premiums may rise as well. Those who live off interest income on investments might cut back on spending, which can affect revenues in small businesses.

In March 2020, the Fed slashed the interest rate to between 0.00% and 0.25% to stimulate the economy and encourage spending among both businesses and individuals. For context, in 2019, personal consumption was the biggest part of the U.S. GDP at 70%, with business investment the next biggest contributor at 18%. So, what does this mean for business owners?

How lower rates can help

If you have high creditworthiness, now is the time to take a look at your business and where it’s growing. You may have experienced different areas of growth in 2020 than you did in 2019. Is there any part of the market that is new to you, where expansion would positively impact your bottom line? Would the ability to buy larger volumes of inventory create more savings and profit? What about consolidating previous debt with a low-interest loan? Are there ways you can pivot to take advantage of a new opening in the market created in the last year? And perhaps most important, do you have a backup plan, including a source of funding, should your business be interrupted for some reason? Closely examine your business and talk it through with your advisor.

Next, consider your personal finances. Reducing monthly costs will allow you more salary to save or spend, and if you financed parts of your business with credit cards, now is the time to look for low interest cards or refinance your mortgage to reduce stress on household spending.

How they can hinder

Lower rates are meant to encourage spending – but that’s usually to combat a broader slowdown that’ll still affect your bottom line. If you have a consumer goods or service business, you may have felt this the most. Consider whether business-to-business offerings could make your revenues more resistant to shifts in individual spending.

Stimulus plans may make regular lending even harder, as banks are stretched administratively. But as the Paycheck Protection Program gets refunded, there are opportunities for small businesses to access capital through stimulus programs facilitated by local banks. 

As with any financial and business decision making process, be sure to seek the help of your professional team. As your situation becomes more complex, it may be appropriate to work with your choice of a tax attorney and other tax professionals to ensure you’re getting the appropriate level of advices. 

Next steps

  • Review your creditworthiness – would you qualify for a low-interest loan at this time?
  • Take a look at how new capital or a line of credit could help your business capitalize on opportunities or better prepare to weather any storm.
  • Review personal finances – mortgage, car loans – and think about what could be refinanced. Stay focused and plan accordingly. 

Interest rates are subject to change. There is no assurance that any investment strategy will be successful. The opinions expressed are those of the writer as of February 18, 2021, but not necessarily those of Raymond James and Associates, and subject to change at any time. Information contained in this report was received from sources believed to be reliable, but accuracy is not guaranteed. Past performance does not guarantee future results. Every investor’s situation is unique, and you should consider your investment goals, risk tolerance and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation.

“Certified Financial Planner Board of Standards Inc. owns the certification marks CFP®, CERTIFIED FINANCIAL PLANNER™, CFP® (with plaque design) and CFP® (with flame design) in the U.S., which it awards to individuals who successfully complete CFP Board’s initial and ongoing certification requirements.”

This article provided by Darcie Guerin, CFP®, Vice President, Investments & Branch Manager of Raymond James & Associates, Inc. Member New York Stock Exchange/SIPC 606 Bald Eagle Dr. Suite 401, Marco Island, FL 34145. She may be reached at (239)389-1041, email Website:


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