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Lock in Rates

The reduced corporate tax rate and loosened regulatory environment, along with a historically low interest rate environment have made it an advantageous time for finance decision-makers. For example, some corporations are bringing large amounts of capital back from overseas subsidiaries due to changes in tax law. In addition, savvy finance decision-makers are locking in fixed interest rates before additional rate increases. TD economists are predicting the Federal Reserve will continue to move up its policy rate a quarter point once a quarter.

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Consider Shorter-Term Loans

Finance executives who currently have floating-rate loans should evaluate shorter-term loans. A shorter term will save money as interest rates increase. In addition, corporations should consider moving to benchmarks that are rising at a slower pace. According to a recent article in the Wall Street Journal, companies are moving toward one-month LIBOR, as opposed to the historically utilized three-month rate. The three-month contract—which is based on the rate banks believe they will be charged to borrow over the course of that time span—has risen 79 basis points (bps), to 2.41 percent, over the past year, according to LIBOR indexes published on Bankrate.com.

Its one-month counterpart also increased, to 2.27 percent, over the same period. The gap between one-month and three-month LIBOR, which reached its peak in April, has shifted the fixed-income marketplace. As of May, more than half of junk-rated corporate loans had interest payments tied to one-month LIBOR, up from less than a quarter at the beginning of 2016, according to data tracked by Wells Fargo.

The difference between the spreads is due to uncertainty in the money markets and questions over U.S. businesses repatriating cash. Issuers have preferred to fund around the three-month level and, as a result, have pushed up the price for that note, presenting an opportunity for corporations to continue to borrow at a low rate.

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Be Mindful of Inflation

As treasurers allocate capital and lay out their financial plans, they need to consider rising inflation. Inflation is up 2.7 percent over the past 12 months, according to the US Inflation Calculator, and is expected to continue to rise. Rising inflation ultimately impacts consumer-oriented companies, which at times may notice less demand for goods and services as prices rise. Most concerning is the increase in gas prices, which can limit consumers' budgets.

Inflation can also hit organizations through rising business expenditures. Price increases for energy and other inputs can impact a company's growth plan. Fortunately, we have seen many corporations take costs out of their business where appropriate and get more productivity out of their existing workforce. Moving forward, having an efficient employee structure will be imperative to stay ahead of inflation.

CFOs and treasurers have an opportunity to grow their businesses and improve the health of their balance sheets. Debt will not remain affordable for much longer. It's the perfect time to evaluate your bank loans and speak with your financial partner, which can bring deep industry expertise and product capabilities that support you through every business cycle.

Steve Foley is head of U.S. corporate banking for TD Bank, where he oversees a team of corporate relationship managers with specific industry expertise, allowing the bank to have deeper understanding for a client's business. He has more than two decades of banking experience.