Recently, we’ve seen a series of regional banks collapse under the weight of poor judgment around balance sheet management and upward interest rate trends. The lessons learned from these financial institutions apply equally to any business. Read on to learn the factors that drove the recent bank failures and how you can avoid making borrowing mistakes.
Unpacking the situation
When the Federal Reserve increased interest rates to combat inflation, borrowing costs increased. To raise cash and service the increasing interest on their loans, borrowers were forced to withdraw funds. The problem for the banks: they had tied up depositors’ money in long-term loans and bonds. To raise cash to meet customers’ needs, the banks had to liquidate their bond portfolios at a significant loss.
In essence, because these banks had so much money tied up in long-term fixed rate instruments, they had what’s known as a maturity mismatch: their short-term liabilities (in this case, depositors’ call for cash) exceeded their assets (long-term bonds). As interest rates rose and the banks faced a large outflow of cash, they had a significant liquidity crunch. A liquidity crunch doesn’t just happen to banks, it can happen to businesses too when loans don't match the lifespan of the asset to be financed.
Understanding the impacts of fluctuating interest rates
As these financial institutions learned, and what is a basic tenet of sound financial prudence all companies should follow, nothing lasts forever. As you move forward, keep in mind that the structuring of all your financing should work for you not only today but in the times ahead—it can make the difference between long-term survival and sudden failure.
For example, if you borrow at a floating interest rate, unexpected interest rate hikes can leave your business unable to make timely loan payments.
Issues also arise when rates are falling. If you’ve committed to a fixed rate long-term loan, you may be locked in, preventing you from refinancing at lower rates.
Finance your next business move smarter with First American Bank
With the right financial solution structure, your business can gain access to needed capital and protection from interest rate shifts.In partnering with First American Bank, you’re paired with a financial advisor who works to understand your business today and where you aim to take it. You will leverage the capabilities of our expert financing team to structure solutions that match how you’ll use your funds and your projected timeframe, including:
- Asset-based loans: to finance short-term capital needs and based on the value of your assets
- Working capital loans: to finance short-term operating expenses like rent, payroll, and inventory costs
- Equipment loans and commercial real estate loans: customized to finance intermediate and long-lifespan equipment and real estate purchases, respectively.
As your partnership with First American Bank continues, your advisor will proactively inform you about emerging shifts and patterns, and offer strategic advice on how your business can best maximize opportunities and mitigate risk. Together, we’ll work diligently to support your business’s financial stability—and pave the way to more secure short- and long-term success.
