Hedge against rising interest rates
January 29, 2019 - In December 2018 the Federal Reserve announced another rate hike, which raised its benchmark interest rate from 2.25% to 2.50%. The hike marked the fourth for the year and the ninth since the end of 2015.
While rates remain low from a historical perspective, the Fed Funds rate is currently the highest its been in over a decade. In terms of outlook for 2019, some expect that the Fed Funds rate could reach 3.00% by the end of the year (implying two more hikes). However, the FOMC will continue to assess market conditions and broader economic health to determine the validity of another hike. Downward economic pressure would push the Fed to raise rates more slowly, perhaps with only one hike in 2019.
What impact does this have on commercial tenants and businesses? The Fed Funds rate directly impacts short-term interest rates including the prime rate, credit card interest rates, and savings account rates. The Fed Funds indirectly impacts long-term rates, such as mortgages, corporate bonds, and 10-year US Treasury Notes.
Many traditional lenders only offer businesses floating rate loans, using an interest rate (typically LIBOR or prime rate) plus a spread (some percentage) above the base interest rate. With floating rate financing, these businesses are subject to interest rate risk, which could prove more expensive over the course of the loan in a rising interest rate environment.
In addition, for small to medium businesses, lenders are often unwilling to extend credit beyond 1-3 year terms. Where these loans do extend beyond that, they can be prohibitively expensive to the borrower.
In a rising interest rate environment, it is prudent for businesses to consider longer term fixed rate financing. With Securiti, businesses can look to unlock security deposit capital (off balance sheet) at an attractive fixed rate, for up to 5 years. Given its insurance model, Securiti is systematically cheaper than banks or online lenders. The product provides entrepreneurs a hedge against rising interest rates in addition to access to long-term capital they otherwise would struggle to secure.
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