Mitigating Interest Rate Risk: What Every Business Should Know
April 24, 2025
Businesses are facing increasing uncertainty regarding interest rates. Fluctuations in interest rates can profoundly impact a company’s operations, from the cost of borrowing to the returns on investments. While interest rate risk is often an inevitable aspect of business, there are effective strategies to mitigate its effects. In this article, we’ll explore how businesses can manage interest rate risk, reduce exposure to adverse rate movements, and safeguard their financial performance.
What is Interest Rate Risk?
Interest rate risk refers to the potential impact of interest rate fluctuations on a business’s financial condition. For companies that rely on borrowing, changes in interest rates can affect the cost of financing, profitability, and cash flow management. Interest rate risk can arise from several sources, including:
- Floating Rate Debt: Companies with loans or debt tied to variable interest rates are exposed to interest rate risk as rate increases can raise borrowing costs.
- Investment Portfolio Sensitivity: For businesses holding interest-sensitive investments, such as bonds or loans, changes in interest rates can lead to price fluctuations, potentially eroding asset values.
- Refinancing Risk: Companies may face higher borrowing costs when refinancing debt if market interest rates increase.
Effectively managing this risk is essential for preserving the company’s financial health and ensuring that rate changes don’t lead to unexpected costs or losses.
Benefits of Mitigating Interest Rate Risk
- Enhanced Financial Stability
By managing interest rate risk, businesses can protect themselves from unpredictable fluctuations that might affect cash flow and operational costs. This stability ensures that businesses are better positioned to forecast future expenses and maintain consistent profitability. - Reduced Borrowing Costs
Mitigating interest rate risk can prevent sudden spikes in borrowing costs for companies with floating-rate debt. By using hedging strategies such as interest rate swaps, businesses can lock in fixed rates, ensuring their debt remains affordable and predictable, even if market rates rise. - Improved Planning and Budgeting
Managing interest rate risk allows businesses to plan and budget more effectively. Companies can develop more accurate financial projections by understanding how interest rate fluctuations will affect debt servicing and cash flows, allowing for better strategic decision-making. - Safeguarding Long-Term Growth
Interest rate risk management is crucial for companies focused on long-term growth. Unforeseen interest rate hikes could hinder a company’s ability to invest in expansion, R&D, or new business ventures. By implementing risk mitigation strategies, businesses ensure that their ability to grow is not derailed by financial pressures.
Practical Example: How a Business Can Mitigate Interest Rate Risk
A corporate client with exposure to floating-rate bank debt—linked to 3-month EURIBOR—sought to proactively manage interest rate risk during a period of historically low rates.
Anticipating potential rate increases over the life of the loan, the client engaged in an interest rate swap to lock in a fixed cost of funding. We facilitated the negotiation with their banking partners, structuring a hedge aligned with the company’s affordability thresholds and prevailing market expectations.
Beyond execution, we also managed the full post-trade lifecycle. This included recording the transactions in our Treasury Management System (TMS), handling quarterly rate resets, processing all associated payments, and managing accounting feeds via secure SFTP integration with the client’s ERP system. We additionally ensured compliance with all relevant post-trade regulatory reporting requirements.
When EURIBOR began rising sharply in mid-2022 and exceeded the fixed rate, the client’s strategy proved effective. The hedge delivered cost certainty, shielding the business from escalating financing expenses.
While the fixed rate removed potential upside had EURIBOR remained low, the client prioritised stability—enabling predictable cash flows, protecting profitability, and supporting long-term planning and investment.
Interest Rate Risk Can Be Managed Effectively
Interest rate risk is an inherent part of doing business, especially for companies with significant debt or interest-sensitive investments. However, by understanding the nature of this risk and taking proactive measures, companies can mitigate its potential impact. From using interest rate swaps to refinancing strategies, there are various tools at your disposal to protect your company’s financial health and maintain long-term stability.
Mitigating interest rate risk is an essential part of a comprehensive risk management strategy. It enables businesses to reduce uncertainty, plan more effectively, and ensure that rising interest rates don’t hinder growth or profitability. Whether you’re a large corporation with complex debt structures or a small business looking to secure financing, having a solid strategy in place is essential.
Contact Us Today to Learn More
At FTI Treasury, we specialize in helping businesses develop and implement effective risk management strategies to protect against interest rate fluctuations. Our team of experts can guide you through identifying exposure, choosing the right hedging instruments, and ensuring financial stability in times of market uncertainty.
Contact us today to find out how we can help your business mitigate interest rate risk and achieve greater financial stability. Or, subscribe to our newsletter for more insights on managing financial risks and optimizing treasury operations.