President & Chief Operating Officer, Customers Bank
I was asked to speak to a group of business leaders gathered in New York City this week about what it takes to manage in a pre-recession environment. As I gave thought to the topic, I realized just how chaotic today’s management landscape is. More than ever, senior managers need to work closely with their bankers to prepare for the road ahead.
For those involved with equity markets, 2018 was a bumpy ride.
Volatility, uncertainty, and changing global economies could provide further headwinds for businesses in 2019. And, many economists believe a recession could be looming for 2020. Those trends are accelerating.
Japan struggled with years of recession and is just now growing economically again. New taxes in Japan, however, could slow that growth. The Chinese and Indian economies are slowing. The Canadian economy, while still strong, is slowing because of the trade war. Great Britain is trying to figure out Brexit. Europe, apart from Germany, is trending toward political and economic chaos and even Germany is stressing.
In the United States, divided government and the run-up to a presidential election are bound to impact public policies that shape the economy.
The Federal Reserve Bank continued to increase rates for its benchmark funds in December to a range of 2.25 percent to 2.5 percent. In recent weeks expectations for continued rate hikes have diminished. Fed Chairman Powell has indicated the Central Bank is considering whether additional hikes are needed to combat inflation fears.
Two consecutive financial quarters of negative GDP growth is the technical definition of a recession. We are already seeing a gradual decline in commercial and industrial lending. If this continues, it’s a good indicator of reduced GDP growth. The Federal Reserve in its January “Beige Book” out this week noted a slow-down in lending in its New York District and slow-downs in other economic sectors. Whether or not the U.S. economy enters a recession in the coming year or two remains to be seen.
Managing in pre-recessionary times requires different business tactics. You can take steps in the short-term to strengthen your business’ financial standing.
It is important to consult a professional banker when evaluating financial strategies and options. Missteps can be costly. Working with a trusted business banker can help chart a safe course and might mitigate the exposure to future rate hikes. A business banker can also provide customized financial strategies and solutions designed to fit your business’ cashflow and credit profile.
Interest rate hikes have a direct effect on small- to medium-size businesses and their performance. Individually, the 0.25 percent hikes in the Fed Funds Rate might seem small, but in the aggregate the cost of money has almost doubled in the past year or so. Now is the time for business owners to take a step back and evaluate their financial strategies.
As interest rates rise, it is worth considering if it is better to use portions of these cash reserves to pay down debt or consolidate loans. Through normal business operations, many small- to medium-sized companies end up with multiple loans with different interest rates and payment schedules. Consolidating those loans can eliminate redundant fees and even reduce the overall interest payments.
Every business should look at the size of its cash reserves to evaluate whether that money could be doing more work elsewhere. A larger reserve, for example, could help absorb expenses and add to interest income. Running a successful business often means having to hold large amounts in cash reserve to offset unexpected expenses and regular operating costs. It is also important to be able to cover slow pays and no pays from clients.
As you prepare your business for the coming year, consider whether you are with the bank that’s best for you. It is worth shopping around to compare business banking services. Large national banks cast a wide net with their product offers, but they may not offer the best overall products for your business. Working with a regional bank that is focused on serving small- to medium-sized businesses and the broader community in which you operate, could result in more product offerings customized and tailored to your exact needs. These banks tend to offer low to no fees, high tech services, and provide personalized customer experiences. They also tend to be more agile and able to adjust to the changing financial headwinds. Most importantly, you want your personal banker to be a decision-maker; an individual who can give you a definitive answer about the products and services you need.
Buckle up. 2019 will be a lot of fun.