With the global pandemic wreaking its havoc on the economy, interest rates have been dropping to historic lows to help stimulate economic activity. This can be a double-edged sword for businesses, as it can cause a financial squeeze among the most cash-strapped and debt laden operations.
However, prudent companies can channel the energy from the lower interest rates to their advantage. Even if your company can’t obtain new capital, businesses can still benefit from the current environment. By timing certain events and decisions correctly, taking advantage of near-term tax benefits, and re-aligning ownership structures, businesses can reap rewards from lower interest rates – and potentially reshape their operations for a brighter future.
One of the most obvious opportunities to capitalize on the current low-rate environment is to refinance existing debts. Replacing higher interest rate debt with lower interest rate debt can present a great way to save on interest expenses – and also open lines of credit that may not have been available at higher interest rates. Researching lenders and understanding the implications of the new debt are also important. Consider potentially extending the terms of the loan, if necessary, to make sure the monthly payment is realistic.
Rolling existing debt into longer-term bonds can also be a great way to reap the benefits of lower interest rates. Even if attractive short-term bonds are available, it is often helpful to reinvest proceeds in to longer-term, lower rate bonds to maintain the current monthly payment and to benefit from the longer-term accumulation of interest gains.
Companies with taxable income may also want to capitalize on the current low-rate environment. By accelerating expenses, such as capital expenditures and business trips, businesses can leverage the current lower rate to, in essence, provide a short-term loan from the government. The savings earned over time will more than outweigh the short-term loan.
Finally, businesses should also consider restructuring their ownership structures in order to make sure they’re not leaving any potential benefits on the table. For instance, ensuring that owners remain at the same level or higher of their vested stake in the company is important. Rewarding management with additional equity options is also a viable strategy.
There is no time like the present for companies to explore ways to benefit from the current record-low interest rate environment. The attractive rates may not remain in place for an extended period of time, and prudent companies will do the research to identify potential opportunities to refinance debt, restructure ownership, and capitalize on near-term tax benefits. With a little creativity, companies can use low-interest rates to their advantage and, if executed properly, potentially reshape their operations for a brighter future.