For many Australian businesses, increasing interest rates are set to pose (or already posing) significant challenges. Joe Donnachie, Supply Chain Finance Manager at Octet, explains how rising interest rates impact supply chains and its slipstream financial topics such as cash flows and working capital.
While most Aussies will be worried 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 will essentially result in more expensive repayments for them.
This will inevitably have an impact on supply chains. Competition in the supply chain is fierce, with suppliers, particularly those in Asia, able to select which buyers they want to sell to.
Australian businesses are also facing record high container prices, with shipping operators preferring to focus on larger markets, such as the United States. The current lockdown 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 disarray.
With earlier supplier payments being more important than ever, Australian companies are going to require more working capital to help them navigate a supply chain environment that is increasingly challenging and complex. Are there any solutions to this?
Until this point, businesses have enjoyed record low borrowing rates from traditional banks due to the all-time low cash rate and fierce competition from non-bank lenders, enabling them to fund their growth cheaply.
This has meant it has often been considered ‘best practice’ to borrow to fund growth. Since bank loans can be longer-term debts that will take years to repay, this will mean carrying the debt for longer, incurring more interest.
For those businesses who may be looking to use short-term funding to secure goods or services at preferential terms, this will also become more expensive. Banks and other lenders that require physical assets to secure finance to, will likely set more stringent terms. As any business owner who has taken out a bank loan knows, the prospect of losing your house because you can’t make repayments really ups the pressure.
With supply chain competition so high, Australian businesses may not be getting the best terms from suppliers, meaning that stock is slower to arrive, and margins are cut (or that cost is passed onto customers).
The best way to combat this is to buy certain goods in larger quantities and pay up front. Companies that have emerged cash flow-positive from the pandemic are in an excellent position to do this and get ahead of competitors. But those companies that can’t immediately fund this may fall behind.
For businesses that are struggling, there are a range of ‘non-bank lending’ products available that will be much more flexible to the needs of smaller, high-growth businesses across a range of industries.
Many alternative lenders won’t require a business to specify a physical asset to secure lending to, making them more suitable for e-commerce or other similar businesses. Plus, funding types such as debtor finance (sometimes known as invoice finance) mean that companies can receive cash from unpaid invoices early, without waiting for the usual 30, 60 or 90 days to pass.
Because this funding is derived from the sales you have already made, it helps business owners feel confident about navigating uncharted waters.
On the procurement side of your supply chain, a solution such as trade finance provides a line of credit to pay your suppliers immediately, while you repay the financier over time. Paying early can often help your suppliers with their financing and may open the conversation around future discounts for your business. If the timing is managed well, your suppliers can reduce their need for funding, use their improved cash flow to grow their business or pass the liquidity onto their suppliers.
In the event of an interest rate rise, this can be a huge advantage and can help you build valuable goodwill.
Further reading: Why every CFO should be focused on procurement spend.
Most businesses fail because they run out of cash and can’t pay suppliers, employees or their lenders. With interest rates likely to rise soon, stock taking longer to arrive and customers having to wait longer to receive goods, this risk is rising.
But it doesn’t have to be like this. Businesses should be considering different forms of finance that will enable them to compete in the supply chain jungle and secure the goods they need at rates that suit them, using smart finance that doesn’t rely on physical assets. Don’t despair – solutions are out there to help you navigate these challenging times.
About the author: Joe Donnachie is a Supply Chain Finance Manager at Octet, a company that provides working capital finance and payment solutions.