Businesses struggle with limited or overpriced access to capital, and suppliers are passing on these high costs to customers, driving up the cost of goods even more. Even if a supplier makes an effort to absorb costs inside their own process by reducing inventory levels, this just causes further disruption in the supply chain later on.
In this environment of increasing rates, non-traditional sources of financing may become more significant. Companies may benefit more from looking at other suppliers, such as by implementing a supply chain finance solutions, as the rate of funding from conventional loans is anticipated to increase.
There is some consolation that the rate hike really happened since it had been predicted for a while. How the increase will impact their suppliers is the issue that many businesses are asking. Let's examine the effects of higher interest rates on supply chain and corporate value.
What does a rise in interest rates means?
In short, higher interest rates suggest that saving is urged rather than lending. Consumers typically pay more interest on loans when the rate of interest is greater, which reduces their purchasing power. Additionally, it becomes more difficult for enterprises to borrow money. However, because cash can earn greater interest when kept in a bank, it has a higher potential reward.
Does an increase in interest rates result in a larger money supply?
The money supply begins to shrink if the Central Bank raises interest rates. It costs more to lend for banks and people when there is less money in the economy.
A country's money supply does not increase when interest rates do since there is an inverse link between the two. Lower money supply in the economy is the result of higher interest rates. As the money supply shrinks, borrowing costs rise, making it more costly for consumers to carry debt.
The primary lesson to be learned is the fact that supply chain finance is still one of the most affordable sources of liquidity for suppliers. Particularly for unrated or sub-investment grade suppliers, other options are getting noticeably more expensive. Suppliers can access liquidity at costs that are far lower than those accessible to them through other choices since supply chain finance costs are based on the credit history of the buyer, who is often a larger corporation.
Effects of Increased interest rate on supply chain
Interest rates are a crucial tool that can be used to influence the economy, despite the fact that they may initially seem relatively harmless. The behavior of consumer banks is altered when a central bank boosts interest rates, which has a huge impact on how businesses and people spend and save. The primary results of increasing interest rates are as follows:
It becomes more expensive to borrow
Borrowing is becoming more expensive as a result of a higher interest rate, which is the most evident effect. You will probably wind up spending more in interests over the duration of your repayment time if you must borrow money, whether it be through a loan, credit card, or mortgage. Businesses are particularly affected since they frequently borrow considerably more money than consumers do to finance expansion or weather storms. In essence, high interest rates prevent businesses from pursuing debt-driven expansion if the borrowing cost exceeds the rate of return on investment.
It's crucial to evaluate how higher interest rates can influence your suppliers and the entire supply chain, as well as what consequences that might have for your company. Smaller suppliers are expected to incur a greater cost of capital as rates rise. Additionally, in a market with rising interest rates, they might discover that conventional lenders have fewer financing options.
We at Skyscend have collaborated with number of lenders who focus on offering flexible, automated, and tailored working capital and supply chain finance solutions to meet every business need. Businesses would be wise to choose these alternative solutions, which would give them and their suppliers’ access to affordable, ideal, and quick financing options, given the inflated and rising interest rates scenario.