For years, consumers and businesses alike have been concerned about the likelihood of a rate hike and what it might do to their finances, but few groups would be more profoundly impacted than contractors.

Hefty backlogs and broader margins are good news for the industry,but working at full-tilt comes with an acute need for capital to fund growth. For contractors in particular, capital often comes from financing – hence the anxiety surrounding the potential change in interest rates looming on the U.S. economic horizon.

With this eventuality in mind, contractors should start thinking about and planning for their liquidity needs now. By prudently managing investments so they can be used to generate needed cash if financing becomes more expensive, contractors will be poised to not only overcome the challenges of a rate hike but also seize opportunities their competitors can’t.

Overview of Current U.S. Monetary Policy

Monetary authorities, including the U.S. Federal Reserve (the Fed), influence interest rates by buying or selling short-term government debt.

Lowering interest rates stimulates economic growth by incentivizing companies to take on debt, which they use to fund hiring and expansions. On the other hand, increasing interest rates raises the cost of debt and discourages businesses from using credit to expand, which curtails growth and lowers inflation. (Refer to Exhibit 1.)

Unfortunately, the current increase in the global money supply hasn’t led to widespread inflation. Therefore, the Fed must now attempt to raise interest rates (so it can lower them to combat the next economic recession) without causing a separate recession resulting from low inflation and slow wage growth. The most recent increase occurred in December 2015, when the Fed raised the interest rate by a quarter of a percentage point to a range of between 0.25 and 0.50%.

Depending on the Fed’s next steps, several possibilities exist, and the stakes are high for any decision it makes. This article will examine how contractors can position themselves for success regardless of what the future holds.

Prepare for the Worst, Hope for the Best

Since interest rates will ultimately increase, take steps now to become less reliant on lines of credit and turn your untapped cash reserves into a resource that can later offset a higher cost of borrowing.

How to Adjust Your Allocations

1. Review Current Exposure

Review the liquidity, maturity, and titling of the liquid assets on your company’s current balance sheet. If it solely holds cash, then this may be an easy process; however, many contractors maintain other items, including certificates of deposit (CDs), money markets, and single-security stocks or bonds. Once you’ve taken inventory of these assets, assess the current level of exposure to varying economic conditions (e.g., market events, interest-rate movements, and inflation changes).

Assets likely to be susceptible to interest-rate movements include fixed-income assets, such as corporate municipal bonds, which can see large swings in value based on interest rates. Typically, the longer the maturity, the more susceptible it is to rate movement.