The Potential Impact of Negative Interest Rates on Construction

By Daniel Wennogle

On February 11, 2016, Federal Reserve Board Chair Janet Yellen stated at a congressional hearing that the Federal Reserve is "looking at" implementing negative interest rates in the United States. Since that time the Feds message has indicated that gradually increasing rates are more likely what the future holds, but Yellen's willingness to even consider negative interest rates is noteworthy. For many years the Fed kept interest rates low in an effort to stimulate borrowing and economic growth. Countries like Japan have implemented negative interest rates, which effectively penalizes depositors for leaving their money in banks. The central bank's negative interest rates get passed on to other banks' customers in the form of fees and surcharges. This could change the way companies handle receivables.

Most people in the construction industry recognize the term "slow pay," used to describe the practice of an owner or contractor holding on to money as long as possible before paying lower-tier contractors in order to reap the benefit of the interest on that money. Could negative interest rates engender a new term, "slow collect," to describe situations in which contractors seek to shift the burden of holding money to owners or upper-tier contractors? Might contractors change their contracts to include early payment penalties? Might owners require payments to be accepted immediately, perhaps in the form of wire transfers as opposed to bank notes that the contractor could hold for a period of time before depositing? Might contractors rely more heavily on mechanic's lien rights, and the statutory interest rates provided by many mechanics' lien statutes? It would seem foolish not to do so when collecting and depositing money would subject a contractor to further fees and bank charges, while filing a lien and leaving an account uncollected would allow a contractor to reap the benefit of statutory interest and avoid deposit fees and charges. Obviously, cash flow issues and the attendant costs of asserting lien rights would need to be weighed against any choice to "slow collect," but the possibility remains that, in certain circumstances, contractors might profit by "slow collecting" if negative interest rates become a reality. Owners and contractors should revisit their standard payment provisions to see whether an amendment may be necessary to address this potential future reality.

Banks and factoring companies might also benefit from a negative interest rate environment by purchasing or lending against receivables that would be collected later, thus avoiding the penalty of interest during that time.  

Daniel Wennogle is a member of the firm's Construction and Business Litigation practice groups. His practice focuses on construction, property rights, oil & gas pipelines, unmanned aircraft systems, utility companies, and professional liability claims. He works from the firm's Denver office. For more information please contact Daniel or your usual Stinson Leonard Street contact.

Return to the "Emerging Trends" table of contents.

Subscribe to Stinson's
News & Insights
Jump to Page

We use cookies on our website to improve functionality and performance, analyze website traffic and enable social media features. By continuing to use our website, you agree to our use of cookies. For more information, please see our Cookie Policy.