In the current interest rate environment you may be concerned about your company's floating rate debt and the potential impact of increased interest expenses on your bottom line. What can you do to protect yourself? One solution is to take the risk off the table by exchanging your floating rate for a fixed rate in a transaction known as an interest rate swap.
How it works
Suppose you have a $1 million loan priced at LIBOR + 2.50%. Rather than refinance into a fixed rate loan, you can swap your floating rate payment for a fixed rate payment. You continue to pay BBVA the variable rate on the loan at LIBOR + 2.50%. BBVA (the bank issuing the swap) will agree to pay you LIBOR + 2.50% while you agree to pay BBVA a fixed rate. In effect, the two floating rate payments cancel each other out, leaving you with a fixed rate payment.
If your business has floating rate debt, consider a swap.
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