The prime rate is now 7.75% and will likely continue to creep higher until inflation is firmly under control. Many businesses have lines of credit and other loans that are tied to a floating rate based on prime or another index, so interest expense has been increasing as the Fed has raised short-term interest rates.
One strategy to protect against rates rising further is to lock in a fixed rate. This can be a double-edged sword. Yes, it will provide interest rate certainty; however, you give up the potential benefit of rates declining in the future.
Hedging your bets can be a good strategy when there is uncertainty. It may be a good idea to allocate a portion of your debt on a fixed rate term loan to protect rates from rising further, but then also leave a portion on a floating rate to benefit if rates begin to fall.
Additionally, businesses can apply excess cash flow to pay extra principal on whichever debt has the higher interest rate at the time in order to maximize interest savings. It is important to discuss these strategies with your banker and make sure you understand terms, such as prepayment penalties, in order to make the best decision for your business.
Answers provided by Pete Zeiser, President - Chesterfield Commercial at Midwest BankCentre. He can be reached at 314-633-6762 or email@example.com.