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By Wallace Saunders
On May 4, after months of speculation, the Federal Reserve Open Market Committee (FOMC) raised the federal funds rate target by 50 basis points to a range of 0.75 percent to 1.0 percent, following up on the 25 basis point increase implemented in March. The Federal Reserve is expected to increase rates several more times throughout 2022.
In this environment, it is easy to understand why healthcare companies may be caught up in the interest rate hubbub, as such movements in interest rates can result in meaningful increases in the cost of capital over the short term. However, capital remains relatively cheap in historical terms.
As leaders of healthcare companies seek working capital and resources to grow, it is important to consider multiple critical factors, beyond just interest rates, when evaluating financing alternatives and banking partners to support your medium- and long-term success.
Amortization and Tenor
Amortization and loan maturity are key negotiation points during the borrowing process. The additional flexibility and peace of mind that come with a longer maturity may be worth some pricing concession. Similarly, borrowers should focus on the amount and timing of required amortization payments, as these required payments will reduce cash flow available to fund other uses prior to maturity.
Covenants and Availability
Healthcare companies focusing on interest costs should not lose sight of the importance of covenants and availability formulas (if applicable). While a proposal with “rock‐bottom” interest rates may lower borrowing costs, overly restrictive financial or other covenants can meaningfully inhibit businesses’ ability to pursue their strategic objectives. Similarly, unfavorable availability formulas may leave businesses without enough capital to complete projects.
While financing proposals often require personal guarantees, well-capitalized, stable businesses may have the ability to negotiate to eliminate guarantees. Though this may entail slightly higher interest rates, as a business owner, you gain peace of mind that your personal assets are not subject to contingent obligations.
Equally important is working with a bank that has comprehensive, industry-specialized capabilities to support your growth over time. This can mean finding a financial partner with healthcare industry expertise and premium services like treasury management, investment banking, foreign exchange, and wealth management tools.
Financing decisions should entail a holistic approach, considering all relevant factors. While borrowers should certainly seek to negotiate attractive interest rates, it is important to balance this with other important loan terms that can impact your ability to grow and execute your business plans.
In addition, borrowers should seek a financial partner with robust capabilities and a proven commitment to supporting the healthcare industry over an extended period of time. Your bank should be committed – not just to providing capital at attractive rates – but also to helping you and your company succeed financially.
Wallace Saunders is an executive vice president and head of Wells Fargo’s Healthcare Specialized Industries Group. He can be reached at [email protected] or 704-715-4773.
Opinions expressed in this article are general and not intended to provide specific advice, recommendations for any individual or association, or an offer to extend credit. Contact your banker, attorney, accountant, or tax advisor with regard to your individual situation. The author’s opinions do not necessarily reflect those of Wells Fargo Commercial Banking or any other Wells Fargo entity. All Wells Fargo credit decisions are subject to credit approval.
The Editorial Team at Healthcare Business Today is made up of skilled healthcare writers and experts, led by our managing editor, Daniel Casciato, who has over 25 years of experience in healthcare writing. Since 1998, we have produced compelling and informative content for numerous publications, establishing ourselves as a trusted resource for health and wellness information. We offer readers access to fresh health, medicine, science, and technology developments and the latest in patient news, emphasizing how these developments affect our lives.