Every business owner is concerned about the Fed hiking rates and how it impacts their profit margins. With the Fed aggressively hiking in the last year, the cost of funding has dramatically increased for many owners and in 2023 we should anticipate a few more rate increases starting this week. There are a few solutions business owners can take to lower their cost of funding in the future compared to what they are paying now. One of the best ways to lower your cost of funds is to work on improving both your personal credit and your company’s debt ratios. Consider the following:
Lower your personal credit card debt.
This is one of the first areas of focus to improve both your credit score and save you money on the high interest you are paying. One of our customers was evaluating a $20,000 automatic saw for their business and wanted a 3-year lease. After a brief consultation with the customer, we advised him to a longer 5-year term with a 90-day deferred option on his first few payments. By utilizing this structure, the client was able to pay off a larger portion of his credit card debt raising both his credit score and improving his monthly cash flow. Now, 8 months later, their credit is over 720 and they can qualify for better financing as they expand their operation.
Make sure company equipment is funded thru the business.
We have reviewed our customers in both the construction and transportation industries and have seen some customers having their company vehicles listed as installment debt on their personal credit profile. A business vehicle should be funded thru the business, if your dealership or bank are funding company vehicles but listing them on your credit as installment debt then you need to look for additional funding options to grow your fleet. We reviewed a customer recently that had 8 vehicles reporting on their personal credit adding up to over $400,000 in installment debt that could have instead been funded thru his corporation.
Improve your company’s liquidity.
One of our larger corporate clients had a strong personal credit profile and thought they had the strongest credit profile possible. However, they were not as well versed in how their financial ratios appeared on their balance sheet. Their preference has been to pay cash on equipment over the last few years. They thought being debt free made them financially strong. What they didn’t realize is one of the strongest assets a company has is liquidity, i.e. cash in the bank. Paying cash on equipment reduces the financial strength of the corporation since this is draining liquid assets to fund equipment. Even though equipment is listed as an asset on the balance sheet it cannot be liquidated quickly, and the valuation is reduced because of depreciation. This customer is currently renting their business location and one of their long-term goals is to purchase a building to build long term wealth. Last year we consulted with them, started funding a few equipment leases for them over a 4 to 5 year term and they have been able to further increase their cash reserves listed on their balance sheet. Now they can look to purchase a building in the next 12 months and can qualify for a strong commercial mortgage because of the larger down payment they are able to access from their company’s reserves.
If you have more than $10,000 in your bank accounts, then an additional strategy to grow your income is to re-consider higher yield savings accounts. Many of my clients are caught up in the day to day operation of their business and are missing the advantage of generating this passive income. Since the Fed has increased rates significantly in the last 6 months, there are now online FDIC insured banks offering savings account yields over 4%….and these accounts increase their yields every time the fed hikes rates. Consider the fact that $50,000 set aside in one of these accounts would yield over $2,000 annually in interest and you can tap into these accounts should an emergency arise.
While Fed rates will not be lowering in the near future, considering the above as well as other ways to improve your personal credit and business’s ratios will help you achieve better terms and save you some additional financing costs in the future.
