March 21, 2022— Last week, the Federal Reserve announced a rate increase of 25 basis points to combat rising inflation. Officials indicate this is the first of six increases planned for the rest of the year totaling an increase of 1.5-2%. These increases have many business leaders wondering what impact the rising rates will have on their cost of capital.
To put this in context, interest rates are the lowest they’ve been in over a decade. So, even if they go up 2%, and that's your cost of funds, it’s lower than your cost of equity, which is typically 25% to 40%. The rate increases could have an impact on cash flow, but when we’ve done sensitivity analyses on interest rates and loan performance, the increases don’t appear to have a dramatic impact overall.
With this in mind, the robust M&A environment will likely continue, fueled by the number of business owners looking to implement their succession plan and the available amount of capital. Additionally, those who didn’t sell during the recession of 2008 may decide to sell now given the strength of valuations, which continues to increase. Furthermore, the Federal Funds Rates in February 2020, were higher than they are today, so a 1.5-2% increase will merely return us to pre-pandemic levels. These rate increases may alter deal structures to optimize debt and equity for some businesses, but we expect the economic environment to remain strong for the industries we serve.
In summary, the rate increases alone are unlikely to have a significantly negative impact in 2022; however, there are other geopolitical/ macroeconomic factors such as energy and the Russian/Ukrainian war that could negatively impact consumers. In my experience as a founder and CEO, I’ve learned the best way to run a business is to stay focused, stick to your business plan, and don’t try to game the market. Responsible use of debt will continue to be a valuable growth strategy in 2022.
About Oak Street Funding Indianapolis-based Oak Street Funding, a First Financial Bank company, provides customized financial solutions for businesses in various industry sectors and third-party loan servicing for financial institutions. Oak Street Funding incorporates industry knowledge, easy-to-use technology and exceptional employees to deliver top-quality service and capital products to niche businesses nationwide. With in-house sales, underwriting, and servicing teams, and direct access to the CEO and executive team, Oak Street Funding is well-positioned to meet lending needs of borrowers in all stages of the business life cycle.
Media Contact: Rae Hostetler Hostetler Public Relations Representing Oak Street Funding 317-733-8700 Rae@HostetlerPR.com