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For many Australian businesses, rising interest rates are set to pose (or already pose) significant challenges. Joe Donnachie, Supply Chain Finance Manager at Octet, explains how rising interest rates are affecting supply chains and related financial topics such as cash flow and working capital.
While most Australians will be concerned about the impact on their mortgages, business owners will also be looking at their outstanding bank loans and other sources of funding. Most small businesses have outstanding loans in one form or another, and any increase in interest rates for them will essentially make repayments more expensive.
This will inevitably have an impact on supply chains. Competition in the supply chain is fierce and suppliers, especially those in Asia, can choose which buyers they want to sell to.
Australian businesses are also struggling with record high container prices, with shipping operators preferring to focus on larger markets such as the United States. The current quarantine in Shanghai, where authorities are trying to enforce a zero-Covid policy on 26 million people, is just the latest announcement to throw Australia’s supply chains into chaos.
With earlier supplier payments more important than ever, Australian companies will require more working capital to help them navigate an increasingly demanding and complex supply chain environment. Are there any solutions for this?
The end of cheap money
Up until this point, businesses had enjoyed record low interest rates on loans from traditional banks due to persistently low cash rates and stiff competition from non-bank lenders, allowing them to finance their growth cheaply.
This means that borrowing to finance growth has often been considered a “best practice”. Since bank loans can be longer-term debts that will take years to pay off, this will mean holding the debt longer and paying higher interest.
It will also become more expensive for those businesses that may want to use short-term financing to secure goods or services on favorable terms. Banks and other lenders that require physical assets to secure finance are likely to set stricter terms. As any business owner who has taken out a bank loan knows, the prospect of losing your home because you can’t make the payments really adds to the pressure.
Creative financing for navigating treacherous waters
With such high competition in the supply chain, Australian businesses may not be getting the best terms from suppliers, meaning inventories are slower and margins are reduced (or costs are passed on to customers).
The best way to combat this is to buy certain items in bulk and pay in advance. Companies that have come out of the pandemic with positive cash flow are in a great position to do this and get ahead of their competitors. But those companies that can’t fund it immediately may fall behind.
For struggling businesses, there are a range of ‘non-bank loan’ products available that will be much more flexible to the needs of smaller, fast-growing businesses across a range of industries.
Many alternative lenders will not require a business to specify a physical asset to back the loan, making them more suitable for e-commerce or other similar businesses. Additionally, types of financing such as debt financing (sometimes known as invoice financing) mean that companies can get cash from unpaid invoices sooner rather than waiting for the usual 30, 60 or 90 days to pass.
Since this funding is derived from sales already made, it helps business owners feel confident navigating uncharted waters.
On the supply side of your supply chain, a solution like trade finance provides a line of credit that you can pay your suppliers immediately, while you repay the financier over time. Early payment can often help your suppliers with financing and can open up a conversation about future discounts for your business. If the timing is well managed, your suppliers can reduce their need for financing, use improved cash flow to grow their business, or transfer liquidity to their suppliers.
This can be a huge advantage if interest rates rise and can help you build valuable goodwill.
Further reading: Why every CFO should focus on purchasing spend.
Bad cash flow kills businesses
Most businesses fail because they run out of money and cannot pay suppliers, employees or their creditors. With interest rates likely to rise soon, supplies taking longer, and customers having to wait longer for goods to arrive, this risk is growing.
But it doesn’t have to be that way. Businesses should consider different forms of financing that will allow them to compete in the supply chain jungle and secure the goods they need at the prices they are comfortable with, using smart financing that does not rely on physical assets. Don’t despair – there are solutions to help you get through these challenging times.
About the Author: Joe Donnachie is Supply Chain Finance Manager at Octet, a working capital finance and payment solutions company.
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