Small senior care operators have lived with high interest rates for some time. The Federal Reserve Bank specifically increased interest rates in its fight against inflation. As consumer demand waned, inflation began to drop. Many economists think the inflation rate has remained low enough for the Federal Reserve Bank to consider lowering interest rate on loans. The Federal Reserve's target inflation rate is 2%, so the fight is not over yet. But many Wall Street traders are betting the Federal Reserve Bank is ready to ease interest rates. Will you be ready to take advantage of the new lower interest rate environment? Here are 5 ways senior care operators can take advantage of the new interest rate environment:
Refinance those high interest rate credit cards. Many Owner-caregivers used credit cards for purchases. Refinance those credit card balances with a fixed rate, low interest rate loan. Consider a 3 to 5 year fixed rate loan. Make your loan payments through your operating cash flow.
Secure a Working Capital Line of Credit. Get a revolving line of credit to fund your working capital cycle. That is, use the bank line of credit to pay payroll and accounts payable before you collect your caregiver fees from the insurance provider. As interest rate drops, the interest fees will not eat up your profit margins like previously.
Expand through acquisition. Lowering interest rates means the cost to acquire another agency or facility just got cheaper. Bank financing can account for up to 70% of the acquisition price in a transaction. As interest rates drop, the amount of cash flow needed to serve the debt gets easier. Thus, deals look more attractive from the bank's perspective.
Valuations May Rise. With more bank financing available, buyers begin to bid up the price of target acquisitions. The more money available because of lower interest rates, the more buyers tend to chase deals and bid up valuations.
Pay Yourself More. As long as you do not have too much debt on the books, now may be an opportune time to draw some of the equity out of your business. Give yourself a raise. Take a dividend. If the operating cash flow can support it, recapitalizing the equity in your agency or assisted living facility may be right for you.
As always, be sure to discuss these items with your tax advisor.
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