How These Three Companies Used Hedging to Boost Their Business

Owning a business can be thrilling and rewarding, but it also requires consistent and meticulous evaluation of proceeds and outgoing expenses. More often than not, a business simply does not have the funds at hand to put toward large expenses that enable growth. Taking out a loan can give your business the boost it needs, but the risk of rising interest rates can deter even the savviest of business owners. 
 
In our previous article, we illustrated three hedging strategies that we work with to help business owners offset potential risks and stabilize costs. First American Bank has worked with a variety of private businesses with unique needs and has used these products to deliver peace of mind and substantial savings. Take a look at a few of our success stories below.  
 
Interest Rate Swap Case Study
 
First American worked with a private university on a one-year, interest-only construction loan that it was using to build a new residence hall. The university decided to raise funds for 25% of the cost of the project and planned to use the pledges as they were received to reduce their debt. 
 
In order to avoid the risk of rising interest rates after the construction period, the university used a forward interest rate swap, enabling it to lock in a 15-year fixed rate 12 months in advance. Not only was the university able to convert a floating rate to a fixed rate at minimal cost, the swap offered more flexibility than traditional fixed rate loans. Because swaps can be tailored to fit specific needs, the swap was structured to only hedge 75% of the debt. This allowed the school to protect itself from increasing rates while paying off the loan as the pledges were collected without a prepayment fee.

Interest Rate Cap Case Study
 
A privately held business planned to purchase a $4.5 million piece of equipment and finance it with a seven-year loan. They felt that current floating rates were attractive but were concerned that rates might increase during the last four years of the loan.
 
First American Bank recommended that the business purchase an interest rate cap to protect against an increase in floating rates, while still benefiting the borrower if rates declined. As caps allow the borrower to choose the level of protection, the company minimized the upfront cost by setting the cap at a higher level, while still limiting their risk. 
 
FX Hedging Case Study
 
First American Bank worked with a U.S. construction company that was planning to buy a large piece of equipment from Germany. The manufacturer expected 50% down and the remaining balance to be paid upon delivery. Since the machinery would not be ready for six months, there was concern that the volatility in the EURO/USD exchange rate could significantly increase its cost by the delivery date.
 
To avoid an increase in cost due to exchange rate fluctuations, First American Bank offered a different solution: the company could use a six-month FX forward. Ideal for companies that do business internationally, this product enabled the company to lock in the price of the machinery at the time of purchase and deliver the funds six months later. 
 
A Window of Opportunity
 
With interest rates at historic lows, private business owners seeing lending opportunities may benefit from consulting with our trusted advisors. They can guide you through every step of the process, and help you determine which hedging product makes the most sense for the future growth of your business. Together, we’ll ensure that the only way to go is up.