That’s the essence of today’s announcement from the Federal Reserve that they will continue to keep interest rates low for several more years. The cost of money for growth will stay low to help the economy recover, to provide lending at low cost rates for the companies that need capital for growth, replacement of capital equipment, and other cash needs. That doesn’t mean banks will be more generous with loan approval, but it does mean that competition will keep their rates low when they do say yes.
And there’s the rub for banks. They only make money when they put their money to work, and that means making loans. Since their profit comes from the difference between the rates they pay – to the Fed primarily – and the rates they charge, low rates means their spreads are smaller. That’s the equivalent of a gross margin squeeze in business, and we all know that’s not good for profits. So banks will have this margin pressure to live with until at least 2016, if we believe the forecasts provided by 10 of the 17 Fed officials surveyed today. And if you’re a bank and your margins are being squeezed, your best solution is to sell more stuff, or lend more money.
For the business in need of capital, bank competition for your business is only going to grow. Given the banks’ need to lend as much as possible without making any bad loans, you should actively shop any significant borrowing needs beyond your current bank before you sign on the dotted line. Your current bank should get the first opportunity, just not the only one. If you want to know how to create that competition and wow the contenders, call me at 888-788-6534.
As always, I welcome your comments and feedback.