As the first quarter of 2023 ended, there were various reports that the Federal Reserve’s aggressive cycle of interest rate hikes might be coming to an end. The Fed has projected that peak interest rates could reach between 5% to 5.25% this year. Some observers suggest interest rates could rise higher than that estimate. Rates currently sit in the 4.75%-5% range.
Now might be a good time for corporate boards to re-evaluate their business strategy now that it appears interest rate hikes may be coming to an end. Even though interest rate hikes may be ending, interest rates are expected to remain higher than we’ve grown used to since 2008 – and could stay that way longer than many expect. Are most companies prepared to operate effectively in a high interest rate economic environment over a long period of time? It is the responsibility of corporate board members to determine how their company can grow and thrive in a high interest rate environment.
A few things boards might consider as interest rates reach their peak:
What should boards do as banks tighten their lending to companies? Executives know that lending tends to tighten as interest rates rise. Does the board truly understand how their company’s access to lending will be affected over the next few years? Has management reached out to financial institutions to determine if the company’s ability to access capital quickly has changed due to current economic conditions? Boards must be willing to ask management how it intends to deal with an environment where access to capital may be constrained.
Concerns about the solvency of many banks makes it imperative that companies confirm the ability of their financial institutions to supply the capital they need for expansion, acquisitions, and ongoing operations. Corporate boards must make sure the financial institutions the company deals with can adequately address those issues. The board must also make sure that due diligence is conducted on the financial institutions the company does business with to ensure that they are not at risk of collapse.
Are there business strategies that the board should adjust if interest rates are expected to remain high for a significant amount of time? The board must ask management to clarify its strategy to thrive in a high interest rate environment. Board members should also offer suggested strategies the company could pursue in a high interest rate environment to maintain positive growth.
Companies must remember that their suppliers and customers may also be affected by higher interest rates. Business strategy may need to be adjusted to account for suppliers not having enough capital to meet company orders. Strategy may also need to adjust for customers scaling back on purchases because making higher interest rate payments have hurt their cash flow. Boards will need to collaborate with management to determine the best course of action to deal with both those scenarios.
Since the cost of borrowing money may be significantly higher than it has been recently, some five-year-plan strategies that were put in place a few years ago, may need to be revisited due to the rising coat of financing. Should expansion plans be put on hold or scaled back? Boards will need to have those discussions.
Has the board planned for worst case scenarios? Every board will need to have contingency plans in case the absolute worst happens. What will the company do if the financial institution that holds its cash reserves becomes compromised? What will the company do if it cannot borrow the money it needs to operate effectively? The answers to these questions must be hashed out now. Later could be too late.