By R. Bruce Gemmill
Last month the Federal Reserve lowered interest rates .25 basis points. Usually the FED lowers rates to bolster an uncertain or weak economy. For businesses, lower interest rates offer opportunities to expand.
Now is a good time for businesses to borrow money. During periods when lower interest rates prevail, banks become magnets for businesses eager to borrow. The lower the interest, the more the business can borrow to fund expansion, purchase equipment, refinance loans and lines of credit, acquire market-compatible companies or even buy out partners or investors.
Borrowing money at low interest rates provides a comfortable level of certainty for business owners. Low rates won’t stay forever; higher rates will return, and the difference between interest rates now and five years from now could be enormous. Another thing to consider is that qualifying for a loan when rates are lower is easier than applying for the same-sized loan under a higher-interest-rate environment.
Smart executives will take advantage of the FED’s decision to lower rates by refinancing loans and lines of credit to minimize the inherent risk of being committed to an expensive loan. Also, when rates are high, businesses often take out variable-rate loans since these types of loans usually carry lower interest rates. The fees typically associated with refinancing are usually well justified and offset by the long-term savings realized with a lower rate.
Other circumstances that justify jumping on the low interest rate loan bandwagon include buying out partners and paying back investors. Over time, business partners often find they are not as aligned as they once were, and it may be harder to reach agreements. Or perhaps the business was started with seed money from family or friends who no longer want to be involved. This low interest rate environment offers the opportunity to go to the bank and borrow money to buy out partners or pay back investors.
If you’ve decided to take advantage of these low interest rates and take out a loan, you’re going to want a partnership with a banker who will understand your goals, needs and approach to running your business. In other words, you’ll need a relationship with a person and not a bank. Beyond a banker with whom you have confidence, the person needs to be accessible, responsive and willing to offer suggestions.
Once you have identified a banker or two with whom you would feel comfortable working, you need to research the bank for which that banker works. After all, it’s important to know that the bank for which they work has a reasonable loan process.
There are seemingly hundreds of banks in Alexandria and the surrounding area, but for most businesses, I recommend a community bank. The FDIC 2017 Annual Report stated that community banks are the “lifeline to entrepreneurs and small enterprises of all types.” In general, community banks, both local and regional, provide 43 percent of the loans for small businesses and farms and 75 percent of all deposits in 1,200 counties in the United States.
Community banks are often more flexible, meaning they are more likely to customize a package to suit your individual needs than impose the rigid, cookie-cutter format found at large banks. Additionally, bankers and executive officers at community banks are usually more easily accessible and take time to get to know their customers.
Community banks are thriving, even though recent consolidation within the industry may suggest differently. Mergers and acquisitions don’t necessarily negatively impact the nature of community banks since most of the community bank mergers have been with other local banks. Keeping it “in the family,” so to speak, helps to maintain the value and integrity of community banking and its importance to small businesses.
R. Bruce Gemmill is senior vice president and chief marketing officer for MainStreet Bank, a community bank based in Fairfax with branches throughout Northern Virginia and a new branch opening soon in Washington D.C.