Associated Bank Thought Leadership Podcast

WGN: We're on with Eric Lien, director of treasury management sales and client experience at Associated Bank. Eric, welcome.

Eric Lien: Thank you, Steve. Great to be here. I appreciate the opportunity.

WGN: I'm going to focus in on a couple of things today. First and foremost is the changing interest rate environment. We're going to talk a little bit about what that means for an organization, whether it be an actual organization or business place. We're seeing rates go down. The last couple of meetings have included rate cuts. It looks like we might get another one in December, more next year. What are the financial implications of this?

EL: That's a tremendous question, Steve. And right now we're in a really dynamic environment and really have been for the past 12 months, especially if you're a business owner or a business operator, just because there have been a lot of different pulls that I think we all haven't been used to previously in terms of the speed and velocity of some of these changes.

And, you know, as we look to the historical trends and if you look at a lot of the last couple of rate decreases over the past 20 years, they've come with really pivotal moments, whether it be the financial crisis or even COVID, where we had a really precipitous drop in rates. What we're seeing now, though, too, is a much more kind of step-down approach which allows business owners and business operators the chance to really kind of plan and prepare for those things a lot better than all of us, that if we're making really quick decisions and those rates are tumbling.

So a couple of things to really make sure I'd recommend that people are thinking about is one, if you're more of a net borrower or net investor, and if you're a net borrower, meaning you have debt or loans on your books, it really lowers the cost of capital to your organization. And this is really an opportunity to spur spending. And it's also an opportunity to, for example, if you have a fixed debt that you have the opportunity to renegotiate that, can come in at a lower rate, or else look at more of a floating rate, which allows you to take advantage of lower rates if and when the Fed continues to lower their target interest rate as we get into next year.

Additionally, if you're a net investor, which means you have more cash on hand and you're looking to earn yield, the challenge with that is lower rates just mean there's going to be lower availability for that yield on that excess cash that you have. And so, it's really looking at, like, how does the company take advantage of of the additional cash they have to make it work for them in terms of leveraging to get into more investments, looking potentially at mergers and acquisitions or just investing in organic growth of their organization overall.

WGN: Eric, when you talk about the capital, the idea that companies might have more capital when we see a rate cut, I'm thinking of like the manufacturing and construction industries. Do we always think of expansion during those periods, so we see companies maybe expanding, doing capital projects, doing more building, hiring more people?

EL: Absolutely. You know, that's the ultimate theory behind lowering rates, is that you can't earn as much while you're holding it. And so, it's how do they deploy that cash flow to their organization? And every business and industry is going to be unique in terms of what matters for them. But maybe there's an opportunity, for example, to pay down some existing debt. Maybe there's that, as you mentioned, Steve, how do you deploy that cash to look at potentially growing by a through acquisition or starting a new business line or a different product because you have more cash on hand now to start investing in those things, that maybe you're holding that cash because there wasn't the opportunity to do that at that time.

WGN: Yeah. And then the other part of this too, is when to make the decision to do that. Do we wait for more rate cuts to maybe find a more favorable term before we start doing some of the, as you mentioned, optimizing some of that working capital?

EL: Yeah, that's a heck of a question. And I think so much of it depends just on volatility. And that's one of the things that we recommend to our clients—make sure you have a plan. Because depending upon the month or the quarter, you know, you can look and see what is the predictability the Fed will lower rates. And, you know, right now I'd say it's less than a 50%

chance that they're going to lower rates next week when they meet together. But that could change as other pressures or implications come out.

And then, too, the Fed does meet eight times a year, but there's other things that I recommend companies really look at. There are other kinds of monthly barometers that can help them get a sense of when the Fed would be lowering rate. That could be unemployment numbers, consumer spending and inflation, all which are reported typically on a monthly basis as well, too. And that would give really good indications for a company of when their rates could potentially move.

WGN: Yeah, the betting right now is that we will see a December rate cut. We had another disappointing jobs report from the private payroll company ADP. And so, I mean, the Fed will be looking at that pretty closely, don't you think?

EL: Absolutely. They'll take in a number of different factors in terms of the jobs and what this means for the overall consumer and especially inflation. What does that mean for the cost of goods where it takes the average consumer to buy on a monthly basis as well, to really some big implications that are out there.

WGN: Eric, talk to us a little bit about some of the treasury management tools that are available to enhance that liquidity and efficiency. What do you tell your clients to use? What are those tools?

EL: Yeah, great question, Steve. And so I think you really kind of break it down into receivables in terms of how a company collects their money, and then payables in terms of how they pay people or their employees through payroll, but then also vendors as well too.

And when we go through a kind of a dynamic rate environment, it's really important that we help a company understand what is their working capital position. And the first and foremost thing we recommend is benchmark their current working capital and financial ratios against industry peers that are of similar size to them, because that's going to tell them like, are they potentially within the ballpark or range or do they have an opportunity in some cases to maybe do better and then, or they're ahead of the curve—and how do they stay ahead of the curve?

Getting into some of those products and services—you know, think about accounts receivables. How quickly can a company get an invoice in the hands of their clients? Because the shorter they can shorten that cycle, the faster they theoretically can start receiving payments.

And then additionally, instead of looking at more kind of traditional paper forms of payment like a check, how do they start taking advantage of electronic payment means like ACH or merchant card acceptance? And there's been a lot of changes in the industry that make merchant card acceptance a little more affordable for an organization to take advantage of because you can get paid a heck of a lot quicker leveraging electronic invoicing and then electronic means of payment.

Similarly, on the payables side, we really work with clients to make sure that they're looking at their vendor terms. For example, a lot of times you can see a term 2/10/Net 30, which means you get a 2% discount if you pay within the first ten days of a 30 day invoice term.

Historically, when rates are higher, it probably didn't make as much sense to take advantage of that discount because you could stretch and hold and not make a payment till the end of the term. But as rates continue to climb now, it might be more advantageous for clients to take advantage of that discount and they can do that by leveraging different means.

And again, we recommend more electronic means because they're also more secure. But again, ACH or potentially more of a commercial card or accounts payable card transaction, because that can really help a company extend their days payable outstanding, because your client gets paid now, but typically you don't have to pay that into the card invoice for another 30 to 57 days after that payment is made, which really helps them to stretch their payables as long as they can.

So those are just a couple examples, both in the receivables and the payables side.

WGN: Yeah, I know we've had conversations with your thought leader colleagues about the slowness of the switchover from paper to electronic. Has that been speeding up lately or no?

EL: Very much so. You know, historically I think there's been a lot of change because signing a check was maybe perceived as a sign of control. But there's a lot of risk that goes out there with sending a check payment out, you know, through the mail. We've seen, unfortunately, a lot of mail fraud, and basically you're giving your account number and banking information to anyone that could accept it. And so, because of this prevalent rise in fraud, we are seeing a lot of companies start to adopt more electronic means, which are a lot more secure in that regard, too.

And we're also seeing a lot of demographic changes with our clients, where we see a younger generation coming into the workforce that candidly, in some cases, don't want to write checks or even know how to write checks. And so a couple of those paradigm shifts are really kind of having electronic means really become a lot more prevalent than checks, even though there are still a lot of checks out in the marketplace.

WGN: Eric, you mentioned earlier maybe refinancing some debt, looking over the things, the money that you already have, you know, with interest rates going down. Talk to us a little bit about some of the smart debt strategies that are out there. I know there are several that you you talk to your clients about. What are the best of them?

EL: Yeah, I think it's when rates are falling, there is more of an incentive for companies to borrow just because the cost of borrowing is so low. And so part of it, I think the biggest one for companies to look at right now is really looking at, especially in a dynamic interest rate environment, when rates will be coming down, is looking at more of that floating rate debt because you'll automatically get the advantage of that when rates do decline.

There will become a point, though, that we devise for everyone is, as you look and see the marketplace, if you start to see rates old or potentially economic barometers start to show that rates may increase, then it may be more advantageous for a company at that point to make sure that you get into more of a fixed rate debt because that is lower interest rate would hold as interest rates continue to climb, where, for example, if you were at a floating rate debt environment at that point, then your interest expense would increase as rates increase as well too.

So it's really trying to make sure you take advantage of working with your financial institution to understand where you're at currently. But then, too, where do you see the broader economic conditions going and making sure that you're taking advantage of that for your organization—keeping your debt costs low.

WGN: Are there any hedging strategies involved here?

EL: Absolutely. And part of working with financial institutions is looking at hedging your interest rate risk management, whether that be your foreign exchange risk overall, or working with a bank to determine what you need to hedge from both from a loan rate standpoint as well.

WGN: I know none of us has a crystal ball. You may have one there, I don't know. But most of us don't have a crystal ball. And so want to ask this next question with that in mind—I know you're not going to be completely accurate on this, or you don't have any pull on the future, but how do we future-proof for 2026 for market conditions? As you mentioned earlier, so many things could still happen before the end of the year, at the beginning of next year. How do you how do you tell your clients to proceed?

EL: It's a heck of a question. Stephen, as I mentioned when we started a conversation. It has been such a dynamic 12 months in terms of whether it's tariffs and terrorists and what does that mean for contingent liabilities that a company has. I think the biggest thing that we can advise everyone is have a plan. Work with--if you have a board of directors—or work with your own executive leadership team, to have a plan to say, how are we going to adjust and react if a certain condition or factor happens. That way, when those things do happen, it takes the emotion out of it, and everyone knows what needs to happen and they can execute on that plan specifically.

Part of that then, too, is also making sure you have a documented investment policy that determines, you know, if there are certain thresholds for your organization. Maybe you want to look at moving your investments into a different category or a different product to take advantage of rates, depending upon that broader economic environment. One example right now is as rates continue to potentially decline, again, it lowers that yield. But as a company, look potentially at a laddered CD or a laddered commercial deposit strategy to take advantage of that reserve or strategic cash they have, where they can maximize that yield, especially when we may see rates decline in a short period of time.

The other thing I mentioned as well, too, is really make sure and you can work with your banks on this, but to make sure you're benchmarking your financial ratios and working capital ratios against peers of your industry or similar size, because that'll give you a great indication of how you're performing and where there are some opportunities for you as well too.

And the last one is really make sure to keep an eye on those economic barometers, because even though the Fed does meet eight times a year—and you've called this out from a consumer spending standpoint in our conversation—but look at those unemployment numbers. Look at consumer spending and look at inflation, because those are all great indicators of what is happening in the broader economy, what that means to consumers. And then the Fed will ultimately make decisions and react based upon that as well, too.

WGN: Yeah, And I guess part of the bottom line here is also enlist your banking team, and I guess that's where you and your colleagues at Associated Bank come in, right?

EL: Absolutely. We pride ourselves in providing thoughtful, strategic advice to our clients, not only to help them manage their risk, efficiency and liquidity, but also a lot of the dynamic forces that impact them. And that's the great benefit that our subject matter experts here at Associated bring us. We work with so many different companies and different industries and different sizes that we can bring those different perspectives to help a client, advise them on what's the best thing for them in their company and their long-term strategic goals.

WGN: Eric, great conversation. How can people get ahold of you and have a one on one if they want?

EL: That's fantastic. Thank you for the opportunity, Stephen. Best way is to reach out via email and that is Eric.Lien@AssociatedBank.com. That is probably the best and fastest way that I can help them or else make sure that they get in contact with the right banker and strategic advisor that can help them meet their financial goals.

WGN: All right, Eric, great of you to join our Thought Leader conversation. We'll look forward to speaking with you next time.