December 5, 2022

small business advice

Debt Finances

Jerry Osteryoung | 6/1/2009

If your ship doesn't come in, swim out to it.
— Jonathan Winters

As the economy starts to improve, now is the time to look at all of your debt financing, especially as it affects real estate. This might be the perfect time for you to consider purchasing that property that you have always wanted or to refinance some of your outstanding debt.

With the federal government spending as much as they are, there is no question in my mind that we will see a significant increase in interest rates as we are forced to finance the giant deficits that we are currently building. Right now, rates are artificially low in order to encourage necessary economic growth. In time however, the Federal Reserve will raise interest rates to finance the national debt and curb the inflation caused by having too many dollars in circulation.

However, if we had closed the division, 20 staff members would have been left with little hope of finding employment in this recession. Management and the Board of Directors all agreed that keeping staff employed was the correct thing to do in this phase of the economy, even if it meant taking a small hit on earnings.

It seems like just yesterday when, in 1980 (I know, my age is showing), the prime rate neared 18 percent, making it almost impossible to afford any type of debt. In that case, the Federal Reserve was trying to slow the economy down to reduce inflation.

In preparation for this next period of high interest rates, try to eliminate all variable rate debt and convert it to current fixed rates with maturities that are as long as possible. While there might be closing costs or points to pay in order to make this happen, that amount is going to look like peanuts when rates quickly climb to 10 percent or above over the next two years.

Low cost debt combined with a depressed real estate market is the perfect situation for acquiring real estate, and opportunities like these do not come along very often. I really like the idea of buying real estate at less than the replacement value with cheap debt. After all, it is hard to lose very much money if you buy property for less than it costs to build an equivalent unit.

Now, with so many people experiencing cash-flow problems, banks have a large number of repossessions that they need to unload, both residential and commercial real estate properties. Lately, I have seen numerous commercial real estate transactions receiving financial assistance from the seller. It is a buyers’ market, and the deals are out there for those that have the necessary cash to cover both the down payment and the monthly payments.

Now go out and make sure that you do two things before the economy shifts and interest rates increase. First, refinance as much variable rate debt as you can into long-term fixed-rate debt. Second, if you can afford it, look to acquire real estate either for investment or for personal use.

You can do this!

Jerry Osteryoung is the Director of Outreach of the Jim Moran Institute for Global Entrepreneurship in the College of Business at Florida State University, the Jim Moran Professor of Entrepreneurship; and Professor of Finance. He was the founding Executive Director of the Jim Moran Institute and served in that position from 1995 through 2008. He can be reached by e-mail at or by phone at 850-644-3372.

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