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Just a perspective to share from someone trying to buy property for a small business(since most people think about it from a residential POV). Unlike residenti

Just a perspective to share from someone trying to buy property for a small business(since most people think about it from a residential POV). Unlike residential mortgages, corporate loans are not fixed interest rates. They are all adjustable. What in 2020 seems financially sound, becomes impossible a few years later. I can't imagine how other companies do this, do you just make sure your business can handle 12% interest rates just incase a politician decides to give away free money for a few years? I come from (real) engineering, so everything is just math to me. However the adjustable interest rates is quite a wrench. Do I need to assume a 15% fed reserve interest rate + the 2-4% the bank piles on? Heck, 15% might be low, you never know. I imagine that all businesses would benefit from having some long term certainty. Maybe mid/large companies can raise money or get fixed loans, but I'm at the point where I need to use my feelings(ewwww) to make a decision.

NationalPark 4y ago
Can you hedge against it with interest rate swaps? It seems interest rate risk is probably one of the more manageable risks of a small business that is fundamentally dependent on other people's money - how do you know it's going to succeed in the first place even if rates don't increase?
- hospitalJail 4y ago
  Interesting, thank you and I will look into this. Engineer married a doctor who owns the clinic, no finance people in the family. The company is already doing great, we are just expanding. We have the past performance of the company, so we have an idea if we can afford a set monthly cost.
  - AnimalMuppet 4y ago
    Rent some finance people. Get someone you can consult with on this stuff. There's almost certainly more pitfalls than we engineer types can logic out from what we know.
lastofthemojito 4y ago
Like other cases where businesses focus on their core competency, I think many businesses just rent and let the professional landlords worry about such things. Unless your business is really chiefly a real estate play, like say those self-storage companies that buy property in far-flung suburbs, run a low-investment business for a few decades and then sell the property when sprawl has driven up land values.
- bequanna 4y ago
  There can be good reasons to acquire the commercial property your business utilizes. If you occupy >51% of the space there are SBA loan guarantees which only require 10% down. You can then lease out the remaining space to other tenants.
ur-whale 4y ago
Just rent instead and negociate a fixed rent for the next X years.
- hospitalJail 4y ago
  Basically, just sad to see that money disappear. Not to mention, our last landlord promised the moon and never even fixed their parking lot which caused at least 1 flat tire.
curiousllama 4y ago
Are there no hedging instruments for something like this?
- headPoet 4y ago
  Yes, you can buy an interest rate swap. But I don't know how readily available they are to small businesses.
  - ndriscoll 4y ago
    I think you can accomplish interest rate hedging with Eurodollar (apparently now SOFR) futures contracts which are traded on open markets? But I agree with the other poster that OP should find a finance person.
toast0 4y ago
> Unlike residential mortgages, corporate loans are not fixed interest rates. They are all adjustable. What in 2020 seems financially sound, becomes impossible a few years later. > I can't imagine how other companies do this, do you just make sure your business can handle 12% interest rates just incase a politician decides to give away free money for a few years? There's probably a larger area of acceptable risk to take for a business loan vs a personal loan, IMHO; but if it's a business loan that you're also personally liable for, that's different. Businesses fail all of the time, and it's acceptable. You also have to consider what leverage the borrower has against the lender. If your business can't pay the loan, will the lender be able to find a buyer if they foreclose? If not, they may be likely to let a default slide. I've heard many stories of commercial landlords that let businesses stay rent-free for years because they couldn't attract a new tenant for the space, and it was better to have it occupied and active than empty. I've never heard of residential landlords letting tenants stay for years rent free unless required to or some other special circumstance.
xnx 4y ago
> 12% interest rates just incase a politician decides to give away free money for a few years? High interest rates = "giving away free money"? I thought low interest rates was giving away money?
- mitthrowaway2 4y ago
  My interpretation of what the GP is saying is that a politician might give away free money, causing the Fed to react by setting interest rates at 12% to prevent inflation. Suppressing interest rates would be a different form of free money.
zamnos 4y ago
Fun fact'! 30-year fixed rate mortgages is a uniquely American thing. Most other countries are adjustable rate mortgages, even for boring primary residential loans.
- Faaak 4y ago
  In France it's not. And I have a 25yr fixed CHF loan which is great imho
- throw9away6 4y ago
  Yeah and things go bad every 10 years in those countries when they have a currency crisis
voisin 4y ago
> Do I need to assume a 15% fed reserve interest rate + the 2-4% the bank piles on? Heck, 15% might be low, you never know. If you do make this assumption, then your present value of the real estate will ensure you always get outbid by someone with looser expectations. The conservatism of the market is set at the ability to leverage by the lunatics at the margin.
thunky 4y ago
> I imagine that all businesses would benefit from having some long term certainty Individuals, too: the money you contributed to social security may be gone when you need it, so good luck planning your future. Or maybe you won't get anything until you're 80. Or maybe you'll get half of it. Or it'll be taxed to death. So for the sake of planning, the common advice to younger workers is to assume you'll get nothing. Get back to work.
- tempera 4y ago
  That's the right assumtion: you'll get nothing. As for having a saving, pension account I'd put a little bit aside in bitcoin, just in case in 10 - 20 years it will be a small fortune.
singron 4y ago
There are certain risks that aren't worth hedging in a stable country like the US. E.g. you don't hedge treasury bond defaults because in the unlikely event that happens, your money is probably worthless anyway and you would rather have food and guns. A 15% interest rate is so high that even if you managed to protect your financing with a hedge, it might be unlikely you have solvent customers anymore.
- throwoutway 4y ago
  It's gone higher: > The fed funds rate began the decade at a target level of 14 percent in January 1980. By the time officials concluded a conference call on Dec. 5, 1980, they hiked the target range by 2 percentage points to 19-20 percent, its highest ever. https://www.bankrate.com/banking/federal-reserve/history-of-federal-funds-rate/ https://www.bankrate.com/banking/federal-reserve/history-of-...

NationalPark 4y ago

Can you hedge against it with interest rate swaps? It seems interest rate risk is probably one of the more manageable risks of a small business that is fundamentally dependent on other people's money - how do you know it's going to succeed in the first place even if rates don't increase?

hospitalJail 4y ago
Interesting, thank you and I will look into this. Engineer married a doctor who owns the clinic, no finance people in the family. The company is already doing great, we are just expanding. We have the past performance of the company, so we have an idea if we can afford a set monthly cost.
- AnimalMuppet 4y ago
  Rent some finance people. Get someone you can consult with on this stuff. There's almost certainly more pitfalls than we engineer types can logic out from what we know.

lastofthemojito 4y ago

Like other cases where businesses focus on their core competency, I think many businesses just rent and let the professional landlords worry about such things. Unless your business is really chiefly a real estate play, like say those self-storage companies that buy property in far-flung suburbs, run a low-investment business for a few decades and then sell the property when sprawl has driven up land values.

bequanna 4y ago
There can be good reasons to acquire the commercial property your business utilizes. If you occupy >51% of the space there are SBA loan guarantees which only require 10% down. You can then lease out the remaining space to other tenants.

ur-whale 4y ago

Just rent instead and negociate a fixed rent for the next X years.

hospitalJail 4y ago
Basically, just sad to see that money disappear. Not to mention, our last landlord promised the moon and never even fixed their parking lot which caused at least 1 flat tire.

curiousllama 4y ago

Are there no hedging instruments for something like this?

headPoet 4y ago
Yes, you can buy an interest rate swap. But I don't know how readily available they are to small businesses.
- ndriscoll 4y ago
  I think you can accomplish interest rate hedging with Eurodollar (apparently now SOFR) futures contracts which are traded on open markets? But I agree with the other poster that OP should find a finance person.

toast0 4y ago

> Unlike residential mortgages, corporate loans are not fixed interest rates. They are all adjustable. What in 2020 seems financially sound, becomes impossible a few years later. > I can't imagine how other companies do this, do you just make sure your business can handle 12% interest rates just incase a politician decides to give away free money for a few years? There's probably a larger area of acceptable risk to take for a business loan vs a personal loan, IMHO; but if it's a business loan that you're also personally liable for, that's different. Businesses fail all of the time, and it's acceptable. You also have to consider what leverage the borrower has against the lender. If your business can't pay the loan, will the lender be able to find a buyer if they foreclose? If not, they may be likely to let a default slide. I've heard many stories of commercial landlords that let businesses stay rent-free for years because they couldn't attract a new tenant for the space, and it was better to have it occupied and active than empty. I've never heard of residential landlords letting tenants stay for years rent free unless required to or some other special circumstance.

xnx 4y ago

> 12% interest rates just incase a politician decides to give away free money for a few years? High interest rates = "giving away free money"? I thought low interest rates was giving away money?

mitthrowaway2 4y ago
My interpretation of what the GP is saying is that a politician might give away free money, causing the Fed to react by setting interest rates at 12% to prevent inflation. Suppressing interest rates would be a different form of free money.

zamnos 4y ago

Fun fact'! 30-year fixed rate mortgages is a uniquely American thing. Most other countries are adjustable rate mortgages, even for boring primary residential loans.

Faaak 4y ago
In France it's not. And I have a 25yr fixed CHF loan which is great imho
throw9away6 4y ago
Yeah and things go bad every 10 years in those countries when they have a currency crisis

voisin 4y ago

> Do I need to assume a 15% fed reserve interest rate + the 2-4% the bank piles on? Heck, 15% might be low, you never know. If you do make this assumption, then your present value of the real estate will ensure you always get outbid by someone with looser expectations. The conservatism of the market is set at the ability to leverage by the lunatics at the margin.

thunky 4y ago

> I imagine that all businesses would benefit from having some long term certainty Individuals, too: the money you contributed to social security may be gone when you need it, so good luck planning your future. Or maybe you won't get anything until you're 80. Or maybe you'll get half of it. Or it'll be taxed to death. So for the sake of planning, the common advice to younger workers is to assume you'll get nothing. Get back to work.

tempera 4y ago
That's the right assumtion: you'll get nothing. As for having a saving, pension account I'd put a little bit aside in bitcoin, just in case in 10 - 20 years it will be a small fortune.

singron 4y ago

There are certain risks that aren't worth hedging in a stable country like the US. E.g. you don't hedge treasury bond defaults because in the unlikely event that happens, your money is probably worthless anyway and you would rather have food and guns. A 15% interest rate is so high that even if you managed to protect your financing with a hedge, it might be unlikely you have solvent customers anymore.

throwoutway 4y ago
It's gone higher: > The fed funds rate began the decade at a target level of 14 percent in January 1980. By the time officials concluded a conference call on Dec. 5, 1980, they hiked the target range by 2 percentage points to 19-20 percent, its highest ever. https://www.bankrate.com/banking/federal-reserve/history-of-federal-funds-rate/ https://www.bankrate.com/banking/federal-reserve/history-of-...