How Companies Can Turn Higher Interest Rates Into Profits
In recent days, U.S. markets have been on a roller coaster ride as rising interest rates have rattled investors. However, even though rising interest rates make it more expensive to borrow money and often trigger fears of an economic slowdown, rate hikes can be profitable for companies that know how to take advantage of them.
In this article, we take a look at several ways that non-financial companies can profit from rising interest rates, along with how to get expert advice in evaluating potential opportunities.
1. Make Major Purchases and Capital Expenditures Now.
It’s almost too obvious to mention, but if a company needs to make a major purchase or capital expenditure, it’s better to do it now before long-term interest rates rise again. This can help companies achieve substantial savings on financing charges and overall long-term costs.
2. Lock in Long-Term Supplier and Vendor Contracts.
Rising interest rates usually result in higher prices from vendors and suppliers over time, so they’re a good reason to negotiate and lock in long-term contracts. Avoiding expected price increases from rising interest rates is a good justification and bargaining point in contract negotiations. Companies should use it to avoid future price increases and improve their margins.
3. Lock in Low Interest Rates on Your Current Financing.
If a company has adjustable-rate financing of any kind, rising interest rates signal that it’s time to revisit those arrangements and refinance at a fixed rate. Companies can use the opportunity to lock in the lowest possible rate and minimize long-term borrowing costs.
4. Sell Off Unneeded Assets.
Companies with unneeded property or capital assets can potentially profit from selling them off before interest rates continue to rise. Buyers will typically be looking to buy now, before rates get higher, and they may even be willing to pay a premium to do so.
5. Attract Outside Investors.
If a company is cash-rich, higher interest rates may not have as much potential to negatively impact it. In fact, rising rates can even help attract outside investors.
As interest rates increase, investors may look for companies with low debt-to-equity (D/E) ratios, a large percentage of book value in cash, and those who can benefit from rising rates by earning more money on their cash reserves.
In turn, companies can use that investment to fund new growth opportunities, expand sales and marketing efforts, scale up production, develop new products, or invest in capital equipment.
6. Buy or Invest in Real Estate.
As interest rates increase, real estate prices typically follow, and sometimes they outpace rate hikes. Companies that need to buy property may want to consider doing so before prices get higher and it becomes more expensive to borrow.
Of course, rising interest rates may negatively impact future buyers, but companies that plan and purchase strategically can profit over the long term, despite or even as a result of a rising rate environment.
Evaluating the Best Options for Your Company
While we’ve touched on some of the most common and effective ways to profit from rising interest rates, every company’s circumstance is unique, and there may be additional ways to capitalize.
A good way to evaluate potential opportunities is to work with a qualified corporate strategist or investment banker who can help analyze your options, recommend the right strategies, and even team up with your outside advisors to develop a profitable plan.
At Graphite, we offer a simple and cost-effective way to get started by hiring an independent consultant from our network of more than 5,000 corporate strategists, investment bankers, analysts and other independent professionals.