small business Resource Center

If watercoolers were still the rage, today’s big watercooler topic at many small businesses would be speculation about what will happen with interest rates in the U.S. After years of historically low interest rates, the Federal Reserve recently raised rates for the first time in nearly a decade. The question on everyone’s minds is – will they be moving higher and if so, when? A great many analysts predict they will remain low for the immediate future, but no one knows for sure. What is known is that small business owners will be under pressure to get the best returns possible from operating cash.

When it comes to interest rates, uncertainty doesn’t have to breed complacency. Though no one can accurately gauge when rates will rise, now is the time for you to plan, prepare and be ready for rate increases down the road.

Following the 2008 financial crisis, regulators began implementing Basel III, with the objective of increasing the amount of capital that banks must hold against certain assets in order to strengthen the banking system and ensure financial institutions could withstand future market stress. This has resulted in changes to the way banks value deposits, making it more important than ever for you to develop effective strategies around your liquid cash.

Banks today are actively seeking out businesses with an eye toward increasing their share of cash management wallet in order to meet new capital requirements. In the face of these new dynamics, you need to examine your banking relationship to be sure you are best positioned to take advantage of what your bank has to offer.

For small businesses that rely on a line of credit, the recent Fed rate hike, and the prospect of future hikes is an area of acute concern. Obviously, as the cost of borrowing goes up for businesses such as yours, the bottom-line is going to be impacted. Effective debt management strategies that focus on ways to reduce reliance on loans makes good sense in the event that borrowing becomes more expensive as a result of interest rate increases.

Getting the most out of your operating cash is an excellent way to avoid the use of credit lines. Fifth Third Bank offers a suite of working capital management tools that optimize and expand your ability to capture discounts and determine the most efficient method of paying suppliers, which can lower costs and improve efficiency. Armed with critical insights into your payables and receivables processes, you can examine the terms of payments and decide on the best mix of payment types to meet your business objectives. And by freeing up working capital, you become less reliant on credit lines to support operations, thereby reducing vulnerability to the vagaries of interest rates.

For small businesses with good cash reserves, maximizing your returns requires an effective liquidity management strategy. Part of this strategy will require weighing whether to accept interest on deposits or Earnings Credit Rates (ECR), which offset bank fees, where applicable. You will need to determine which approach is the best use of your cash. And you’ll want to seek guidance from tax professionals within your business to ascertain the tax implications and decide which will deliver the best results.

Small businesses would be well served to work closely with their banking partners to evaluate the available options, so you can get the most out of your operating cash, even in a volatile interest rate environment. Fifth Third Bank can help you make the most informed decisions and help you set processes in place to achieve efficiency in treasury operations and maximize working capital.