Potential for Increased Returns: It is not news that the Federal Reserve has moved from a stimulative to at least a neutral position, and the prospect of a gradual rise in rates is fairly certain. That said, most analysts acknowledge that in the early stages of tightening, as the economy strengthens, investment continues to rise because firms see the potential for increased returns despite the higher cost of money.   An increase of 25bp or 50bp may seem like a lot in the face of such a long period of historically low rates, but the impact on investors who seek returns well north of 30% is actually negligible.

Secure Projections: That is clearly the case with clients of New York Private Finance (www.nyprivatefinance.com).  Our borrowers are entrepreneurs who seek returns of at least 30%, and, as long as consumer demand is not affected by gradual increases in rates, their appetite for continued investment does not slacken.  Furthermore, as we agree with the borrower on a specific return target at the initiation of each loan, although the current portion of their interest expense may rise as rates overall do so, the all-in-cost is likely to increase only marginally over our typical five or six year loan, driven primarily by the borrower’s own increasing return.  This is important to our borrowers, because it enables them to estimate a cost of money for the entire period of the loan and therefore project returns more securely, given a reasonable range of estimated financing costs.

Financing Puzzle: This is not to say that New York Private Finance is the only reliable source of debt capital in a rising interest rate environment.  Our clients will continue to finance their enterprises at the senior and perhaps the mezzanine level to an extent consistent with the economic model of the business.   As always, we remain generally the last piece of the financing puzzle for an entrepreneur who wishes to grow, diversify or buy out a partner. The key is that this last piece of the puzzle offers a tenor of as long as six years, relatively consistent cost and the ability to prepay without penalty once the initial draw-down period has passed (typically twelve to eighteen months.)

In a gradually rising interest rate environment, loans from New York Private Finance typically increase only modestly in overall cost and provide the stability that medium term financing assures middle market entrepreneurs.  In fact, with the business outlook continuing to be favorable and the prospect of rising rates, now is a superb time to borrow funds from New York Private Finance to capitalize on continued economic expansion.