Five Steps to Consider in a Rising Interest Rate Environment

Today the Federal Reserve raised interest rates again.

Over the last several years we have lived through a period of extraordinarily low-interest rates. And for some business owners, they assume this is the norm.

I am often asked, “what do I think will happen with interest rates going forward?” And until recently I always answered with a joke “If I knew for sure, I would be on the beach in the Bahamas drinking martinis !!!”

But recently my answer is different. I think interest rates are going to keep going up (as they have the last few months) and this is a smart time to lock up long term fixed interest rates where possible.

We are in a period of economic growth, and tremendous uncertainty. There are new sheriffs in town in Washington. And as I wrote about in my last column, we have seen business lending by banks slowing down.

Here are five steps business owners should consider.

  1. If you foresee real estate purchases over the next year or two, you might wish to accelerate your search. Interest rates could be much higher in a year, and make the cash flow prohibitive.
  2. Look at the SBA 504 program for equipment and real estate purchases or refinances. This program offers exceptionally long fixed interest rates with ten percent down.
  3. Review your current loans and be sure you understand what happens at different trigger points in the agreement. If you have an arm, what happens at the next bump?
  4. If you own real estate without any debt it on now, considering getting a loan against it with fixed rates and use the cash to pay off other variable debt or invest in your business.
  5. If your line of credit is close to maxed out, consider terming some of the balance out with fixed rates.

Are You Over-Leveraged or Under-Leveraged?

It’s a simple and important question.

There are a lot of important variables and tools that go into building a business: people, product, service levels, marketing messaging, culture, financing – just to name a few.

In the middle of the ever-flowing puzzle is another question that can often be the key to a lot of issues: are you over-leveraged or under-leveraged?

To put the question more simply: some companies have borrowed the maximum they can. Even if they wanted to, borrowing more money and using it to expand or grow is not an option. They have leveraged their cash flow or collateral, and there are no more alternatives.

Many companies are in the completely opposite situation: they are under-leveraged. If they wanted to inject capital onto their balance sheet, there are plenty of opportunities to do so.

If you are under-leveraged, there are a few key questions to ask.

Firstly, how much money could you borrow, at what rates, and over what terms. If you were to “maximize your leverage” or take full advantage of the cash flow or assets your company has built, how much money could you get.

And then you need to ask yourself what you would do with the money, and if the potential benefits outweigh the risks.

The goal of this exercise is not to leverage yourself to the hilt.

The intent is to start managing your business off your balance sheet instead of your income statement.

If you can borrow more money, and have a good idea what you can do with it — come up with three simple scenarios.

What is the worst that would happen? If the investment is a disaster and doesn’t generate incremental revenue – what would happen to your cash flow as you pay off the debt?

The other side of the coin is the home run scenario. If everything worked out perfectly, how much incremental profit would you generate, and how quickly could you pay down the debt?

And the third and likely scenario is something in the middle.

Sometimes working through this exercise can unlock whole new ways to think about offensively growing your business.

Bankers Hate Change

And what business owners can do about it.

Have you ever gone to a cocktail party with a bunch of commercial bankers? It’s not typically a rowdy affair. Bankers, by nature are a conservative bunch who like things to stay as they are. And while they are in the business of lending money, managing risk is in their DNA. And any change on a macro or micro level gets their antenna up.

Election years typically bring about uncertainty, and this can often give bankers pause. And then the administration takes over, and things usually settle down.

But this year is different. If you love Trump or hate him, I don’t think anyone will disagree that change is in the air. And while typically business people high five the calls for reduction in regulations and taxes, the other side of the coin that is not discussed is the general anxiety across many industries and borders.

I wasn’t surprised to read in the Financial Times this week that, “For the first time in more than five years, total outstanding bank loans have dipped for two consecutive months with declines in December and January. The Federal Reserve’s latest figures, published on Friday, show that the weakness has continued so far in February.”

It’s tougher to get a bank loan today than it was a year-ago. If you like it or not, bankers are going to look at business plans more carefully, challenge assumptions, and worry about risk. Business plans that involve relying on imports / exports will be thought about much more carefully, just to name one example.

And likewise, periods of uncertainty typically lead to rising interest rates. This makes bankers more nervous to lock in long term fixed rates.

The “Trump Euphoria” is balanced by “Trump Anxiety”. This is not intended to be a political statement, it is the reality on the street.

To respond to this, we recommend business owners take a few steps.

  • Explore any opportunities to lock in long term fixed interest rates today. If you own real estate or are considering purchasing it, now is a good time to consider refinancing or taking the plunge.
  • Seriously consider using the SBA for your loan requirements. Banks will be more inclined to lend money with the government guarantee intact.
  • Give yourself extra time to get a loan and be prepared with good documentation, and a well thought out plan. The process will likely take longer than you think.

An Oasis of Hope

My experience at Vistage’s annual Chair World conference.

People often look at entrepreneurial icons such as Mark Zuckerberg of Facebook and look at their lives enviously.  What they often don’t understand is the emotional stress and mental exhaustion that goes into building great companies.  The ups and downs on the roller coaster ride are often dramatic.

As an entrepreneur, I think I know the other side.  And in today’s world, some of the stress is exasperating.  All the change in Washington brings uncertainty.  And while this can create opportunity, it also compounds the difficulty that entrepreneurs have making decisions with imprecise information.

We don’t really escape this state of mind.  It just is what it is.  We learn to thrive and survive on it.  We sleep and think it 24/7.

Yet somehow, last week in Orlando, Florida of all places, I seemed to step away from it all into a community that offered an Oasis of Hope.

I attended the annual Vistage Chair World conference.

Vistage is a membership organization that is comprised of small CEO advisory boards across the world.  Once a month, CEO’s from non-competing industries get together, share ideas, and collaborate and challenge each other.  The group is facilitated by a Chair, who is often a retired business owner or executive who enjoys bringing their insight and experience to their groups.

Once a year the Chairs from around the world get together and share ideas and learn together.  What is rare about the experience is to be surrounded by a community of givers whose mission and purpose is to make the role of a CEO a little less lonely.

I am a member of a Vistage group, and the experience of these monthly meetings is terrific. I don’t think you really realize the power of the organization until you’re in a room with a few hundred people who have dedicated this stage of their careers to this mission.

It is a calming and exhilarating experience – all at the same time.  You realize that there is an organization dedicated to helping.

I have returned from Orlando and I am back to the grindstone, but feel fortunate for the experience of attending this conference.  The perspective and pause were very helpful.

If you’re a CEO or entrepreneur who feels like you’re alone, consider joining a Vistage group.   It may provide an Oasis of Hope for you as well.

Has Your Business Hit a Speed Bump?

Adjust before it is too late.

One of the first questions I like to ask entrepreneur’s and CEO’s when I meet them is what stage of their business journey they are in. I present four categories: the contented, the growers, the speed bumpers, and the exiters.

Building a business is rarely ever a straight line up to the top. There are twists, turns, and bumps along the way. Sometimes the adjustments are small and easy. Occasionally you will hit a big one, and major shifts can be required. These are speed bumpers and about ten percent of the entrepreneurs I ask this question to fall into this category.

Speed bumps are survivable. As hard and painful as they are if you handle them well your company can end up stronger and better on the other side. But if you don’t adjust and respond, you will find yourself in serious trouble.

About two weeks ago, I landed in Omaha, Nebraska late at night. I had forgotten to charge my iphone earlier in the day, and I was out of juice when I landed. So instead of waiting to power up to order an uber, I did an old-fashioned thing and jumped in a cab.

My cab driver was sure happy to see me. He had been waiting for a ride for four hours. Before uber, his average wait was 45 minutes. The $20 I gave him for the $10 dollar ride did not really seem to make up his pain.

I asked him about shifting his life around, and he could not comprehend the thought. Although he was young, he had been driving cab for nine years and it was all he knew how to do (in his mind).

This young cab driver had hit a speed bump, and he keeps driving over the same one. He can’t make a change. In this case, technology had moved his world. In other instances, an entrepreneur might lose a major customer or a supplier. Something shifted.

The next time you hit a speed bump (and you might not see it coming) don’t follow the example of the cab driver in Omaha. Adapt and flex. Or it will be a long wait on a cold night for your next dollar.

Trying to Solve a Financing Challenge?

Choices will help you make a better decision.

As I write this column, I suspect there are hundreds and thousands of CEO’s and entrepreneurs at this moment who are trying to solve a financing challenge.

Sometimes they are stuck because they are exploring one path and can’t get out of their own way. A simple tool to get out of your own way is to push for a very different solution. Usually there are a couple of ways to skin a cat. The contrast in the choices should help you make the best decision.

I want to share three examples with you.

Yesterday, I spoke with an entrepreneur who is working hard to get a new start-up off the ground with a partner and they need a few hundred thousand dollars to do it. He has been fighting with the bank for months to get it done and start-up loans are incredibly tough.

This entrepreneur has an alternative. He owns an existing business that is cash flowing and could easily get the loan – and then lend the money to the new company. It’s far from a perfect solution, because if they follow this approach only one partner is taking the risk.

He has a choice. Keep fighting for Plan A or reach an agreement with his new partner that compensates him for taking the risk and get going with Plan B.

Today I spoke with another business owner whose business is eligible for an SBA loan at a low rate and a long amortization. He liked the terms, but was not happy with the personal guarantee or lien on his house.

I explained that his option was to get an investor and dilute his equity in the company.

The contrast made him think.

And as a third example today, I talked to a client who has been struggling to get a term loan for his business that had a tight cash flow year last year.

His option, which he didn’t realize, is to get an Asset Based Line secured with his Accounts Receivable and inventory. It will give him more money, and the opportunity to grow and expand.

Usually, there is more than one way to solve a problem. Push for a Plan B, or Plan C. Stare at the alternatives, and you will make the best decision.

When Should You Take on an Investor vs. a Loan ?

There are times when this choice is necessary and appropriate.

I have always been a big proponent of the principle that at whatever stage a company is in, when there is a need for capital it is wise to consider both debt and equity alternatives and then decide which is best for you.

I have an inherit bias towards debt. It’s almost always cheaper then equity if things work out as planned, and allows the entrepreneur to stay in control of their company and avoid dilution.

Today, I was asked an interesting question when I was conducting a Vistage workshop for a group of CEO’s. A member challenged me (which is great) and asked me if there are scenarios when equity is better than debt.

And my answer is that I think there are three scenarios when it’s better to take on equity vs. debt.

1. If the company needs more money, and has maximized its borrowing capacity.

2. If the CEO / entrepreneur feels that they have maxed out on the personal risk they are willing to take with the company and want to take some chips off the table.

3. If there is an investor that brings significant strategic value to the business (more than money) and you feel can help grow and support the business that you want to build.

None the less, I offer two cautionary notes.

1. There is probably (and usually) a way to do what you want to do with a lot less money than you think. Challenge your assumptions hard and think through different scenarios.

2. Consider your courting with an investor like a marriage, and don’t fall for the Shark Tank myth of love at first site. Have serious conversations with the investor about the business you want to build, and discuss good and bad scenarios and how you would both respond to them.

Remember that when you take on a loan, you’re obligating yourself to pay it back. And when you take on an investor, you effectively just got married for the life of your company. This decision is worthy of a lot of thought and consideration.

What Business is Your Hero?

Take some time to think about whom you want to emulate.

Remember when you were growing up? At different points in our lives we all had heroes and they probably changed over time. Who was your hero and why did you want to be like them? Think about it. Was it a sports star, a rock star or maybe a politician?

I think every entrepreneur should think about the same exercise in a different light. What company is your hero? Who do you want to be “like” when you grow up one day.

As we think about our businesses – there are many metrics that come to mind. EBITDA, Growth Goals, Market Share, Funding Rounds — just to name a few that come to mind.

What makes you tick and why? Try not to think of a competitor. Consider companies in entirely different industries than your own. Perhaps businesses that you frequent could also be a role model.

I thought about this exercise the other day when I dropped off my car for service at the local Exxon dealership in Maple Glen, PA. I have frequented them for years, and my son was getting ready to drive. I handed them the keys, asked them to “do whatever was necessary” and I jumped into an Uber and headed to the airport.

I returned two days later. I picked up the car and paid the bill which was reasonable and fair. Exactly what I expected. The local Exxon business is built on good old fashioned trust.

I want my company to be like the Exxon station. I want it to be that way today, tomorrow and as we grow. I will compromise speed and fast growth for trust and longevity any day of the week.

What company is your hero and why? Who do you want to be like when you grow up?

What is Holding You Back from Growing Your Business?

The answer might not be so obvious.

Have you ever had a significant amount of pain and decide to go for a massage to get it “fixed”? I recently discovered “trigger point massage” and learned that often the point in the body that is causing the pain is nowhere close to the pain. An experienced “trigger masseuse” knows how to find the root of the pain, and hopefully solve the problem.

“Trigger Points”, are prevalent in business also. Let’s face it, running and building a business involves a constant complex set of decision making. As entrepreneur’s we are constantly playing “offense” and “defense”. Our days and nights are filled with ups and downs as we deal with issues. What is clear today might be ambiguous tomorrow.

If you have a sore shoulder and go get a trigger point massage, you might be surprised if they spend the time working on a point in your lower back. In business, if you have a customer service issue, you may focus on hiring or firing the people in that department. But if they’re good people, and the issue is bad quality products – then you’re not focusing on the trigger point.

Always look for the “root” of the issue or the “trigger”.

Often, when it comes to growing a company, the trigger is a fear of investment, taking on debt, or ruining the status quo. If you know what you need to do to grow your business, have a strong thesis for the return on investment, can borrow the money to do it, and the expected return is higher than the cost of capital, what is holding you back?

If the answer is fear or risk aversion, that is OK. Understand the trigger and be comfortable with it. If you can overcome your fear, make a move and get your business growing.