Since the start of the pandemic, the interest rate environment has presented plenty of challenges to commercial borrowers and depositors alike. While low rates have offered favorable opportunities for the former, many of the latter, accustomed to relying on revenue from excess funds, have been forced to reconsider revenue projections from earned interest on their deposits. 

Complicating matters for investors this year, the Treasury yield curve has been flirting with inversion, which is when the interest rates on short-term issues exceed those of longer-term ones. Recently, the yield on the 2-year Treasury issue was higher than the 10-year note, and some market-watches are forecasting more rate inversion throughout 2022.

Whether the inverted yield curve is a precursor to recession is debatable; what's not is that there's historical precedent for concern. In any case, depositors know that the current rate environment continues to offer very few opportunities to rely upon interest income from cash holdings, and prospects of a looming recession and the market’s response to Russia’s invasion of Ukraine may cause them to think twice about investing in the equity market.

Although a bank money market account offers a safe place to keep funds with immediate availability, there are other alternatives a business might want to consider before parking excess capital there for the long term, including:

• Using excess cash to pay down debt. Now is a great time to speak to your banker about using excess funds to pay down commercial loan balances. There are advantages and disadvantages to prepaying credit obligations, but your banker can help you better understand your balance sheet and identify situations where you can save on interest costs while maintaining adequate cash on hand.
• Making capital expenditures. Using excess cash to make purchases could save money by allowing your business to lower taxable income through increased deductions. The decision to purchase land, physical space (e.g., a building), or equipment should be made with an eye to the business plan and after consultation with your banker and accountant.
• Opening certificate-of-deposit accounts. Putting funds in CDs enables you to lock in an interest rate in a safe investment for a specified term. Many depositors use a “laddering” strategy of investing funds in CDs of different maturities, allowing them to benefit from an uneven rate environment by placing funds in different terms.
• Exploring alternative investments. Our Wealth Management team speaks to businesses every day about the best use of business capital. Options for businesses to best employ excess funds include establishing/funding a retirement plan, finding opportunities for higher yields, and benefiting from tax-advantaged investments.
• Capitalizing on trade discounts. If you make purchases from a supplier that offers trade terms such as a 2% discount for payments made within 10 days or the full amount due in 30 days (2/10, net 30), you’re paying annualized interest of over 36% if you’re not taking advantage of the discount. While remaining mindful of monthly cash needs, capitalizing on trade discounts is a great way to use your excess cash effectively.
• Reducing operating-account service charges. Instead of keeping funds in a low-interest investment account while paying maintenance fees on your business checking account, talk to your banker about using some of those funds to offset activity fees. Analyzed business checking accounts apply an earning credit rate to collected deposits in the account to reduce or even eliminate monthly service charges. 

Suffice it to say, businesses that have made it through the pandemic already know that even the best revenue projections often require mid-cycle adjustment. Planning cash-management alternatives in a challenging interest environment is just another way to prepare for other types of disruption as well.

Please contact me at (608) 826-3516 if you would like to discuss your cash management options.