Interesting times for interest rates

Keep track of the Fed’s rate changes, because they’ll affect your business in 2018 and beyond

By Dennis Walsh

FARGO, N.D. – This time of the year, many of us are looking ahead and considering how the world around us will impact our business strategies. As a banker for the past 38 years and in my current role as chief credit officer for First International Bank & Trust, I am often called upon to share my thoughts about not only how to best operate our business, but also how to help our customers plan for their futures.

These are interesting times as we consider the impact the rising interest rate environment has on business.

Four rate increases by the Federal Reserve in the past year have caught the attention of individuals and businesses, as the prime rate has jumped from 3.5 percent to 4.5 percent. To put this in perspective, the prime rate was at a historically low level of 3.25 percent for more than seven years following the 2008 downturn.

For those of us who remember rates of more than 20 percent in the early 80s and consistently over 12 percent for most of a decade, these rates seem very low. But many in business (and especially financial services) have never experienced double-digit borrowing rates.

So, rate increases have stimulated discussion about future rate trends and potential impacts to businesses and individuals.

The Federal Reserve has indicated that rate increases may continue in 2018, prompting speculation that rates may increase another ½ percent to 1 percent. But the Fed’s decisions will be impacted by economic trends, especially inflation and Gross Domestic Product growth.

Also, the global economy will impact domestic rates, as much of the world still has lower interest rates than America. Continued domestic growth coupled with strong global growth, especially in major economies, could signal a longer-term trend of increasing rates.

Thankfully, we have seen optimism arise from the small business sector as a result of the reduction in corporate tax rates, which should have positive impact on our economy.

Businesses considering the purchase of long-term assets also are impacted by higher rates. This impact is strongest for assets (such as real estate) that provide a lower level of return on investment.

Additionally, the carrying costs of inventory and underperforming assets become larger concerns as rates increase Higher interest rates require all businesses to reassess borrowing costs in management decisions. Also, businesses that have grown with debt and are carrying significant long-term debt feel the immediate impact of higher interest costs to their bottom line.

As in any economic condition, it’s always good to use prudent business practices when examining expansion and growth initiatives. Consult with a trusted financial partner to build out “what if” scenarios so that you can best be prepared with a structure in which your business can still thrive.

Agriculture producers are significantly impacted by higher interest rates because of the large capital requirements for ownership of land and expensive equipment. Agricultural real estate has historically low return on investment, so the low interest rates of the past 15 years have helped to stimulate agricultural real estate values.

Higher long-term rates coupled with current commodity values and declining agricultural income could put significant pressure on agricultural real estate values.

Some businesses that do not depend on large fixed assets may feel little direct impact from higher interest rates. However, if the rates slow economic growth or hurt business clients, all businesses may experience indirect impacts.

The high rates of the early 1980s were used as a tool to stop rampant inflation, but they also slowed economic growth to a crawl.

As businesses and individuals, we can speculate on interest rate trends, but none of us know for certain what will happen. Just as we need to make adjustments for outside forces beyond our control such as weather, competition and economic trends, we need to manage the impact of interest rates.

It’s important to surround yourself with a team of experts who can examine all aspects of your business and direct you to a safe yet profitable path.

Without a doubt, we are in a time of change. Lean on those of us who have traveled this journey once before. Strongly managed businesses with guiding principles may continue to enjoy success in spite of increasing interest rate impacts. PB

Dennis Walsh CHIEF CREDIT OFFICER, FIRST INTERNATIONAL BANK &

We look forward to many, many years in our awesome new home!

We are so excited and thrilled with our new facility. It not only gives us the efficient work and meeting spaces we were striving for, but also captures, by its beautiful design, many elements that relate directly to our company and our work. —Karen Thingelstad, Vice

President & CFO