I have floating rate SBA commercial borrowing with 30 year term. Right now, the interest rates are low and My cash flow from the operation covers interest very well. But if Interest rates go up, the equation can change dramatically. How can I hedge this risk? SBA does not allow fixed rates.
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There is a way to hedge as you assumed there was. Since your borrowing is for a 30 year term, I think perhaps your best bet would be to sell a future contract on the 30 year U S bond through the Chicago Mercantile Exchange. You will need to open a commodity account with a broker to do so. Interactive Brokers is one that is on line. There are problems with doing so. The contracts are not long term. The furthest out you can currently trade is Sept settlement. They are marked to market daily which means if the price goes against you you will have to post more margin. As the settlement date approaches you will have to buy back the contract at perhaps a loss and role it into a future month with of course brokerage fees on both the buy and the sell. The contract is for $100,000. That might be more than you would wish to hedge. Also IB has a $10,000 minimum amount to open an account. Anyway that is one option. By selling one contract if interest rates rise, the value of the contract falls and you make money that will offset your interest rate rise on your SBA loan.
Here is another option. Very similar but different and perhaps more expensive. You could open a stock brokerage account with a different on line broker and sell short an index fund based on long term bonds. TLO is one. The problem with this strategy is that a short seller will have to pay the monthly dividend. Not good.
One other option to consider is the following: If interest rates rise, stock prices have tended in the past to collapse with the rise because it is more difficult for a company to make money with higher interest rates. So one option would be to short a basket of non dividend paying stocks or very low paying dividend stocks. There are index funds that will do this for you and pay you dividends besides. PSQ is one. It shorts the NASDQ 100. The stock market has been rebounding lately so the price of this one is down. If interest rates rise, the price should go up. I think I would wait until there is some indication of a rise though. The economy is crap and the government is giving money away by the basket full in order to save all the dead beat borrowers--AIG, GM, C, BAC, etc.
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Take that extra cash and save it for the hard times or pay upfront or xtra on the current bill.
Any long term interest rate products in the financial market?
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