In March 2017 the Fed funds rate rose .25 percent. Although this is a small increase, it is the second such rate increase in three months, yet only the third increase since 2008. According to the Fed and Janet Yellen, two more increases are planned this year.
In some ways, rising interest rates should be a sign of economic recovery and a more powerful dollar. There are economists who don’t share the Feds’ optimism for “normalizing” rates.
If you are optimistic about interest rate increases, however, you probably have money in CDs, interest-bearing or money market accounts. Or, you are a bank.
More rate increases are less welcome for a business that is borrowing.
Your suppliers will be paying more for their money
For borrowers, the biggest negative about an increase in the Fed rate is the parallel and nearly instantaneous increase in borrowing rates. Businesses with variable rates on borrowed capital are paying just .25% more now. But, with two more planned increases this year (and hints of three more increases next year) those rates are going to add up. Now is the best time to borrow — if the funds are needed and if the business has access to lending.
For your smaller suppliers, this could be a big issue. Many SMEs don’t have access to affordable lending, and some do not have access to lending at all, according to our 2016 Working Capital Outlook Survey. This survey reveals 29 percent of SMEs do not have access to working capital. Nearly half of the SMEs that can borrow cannot access financing at an annual percentage rate of less than 8 percent — and this figure is prior to the rate increase.
Five more proposed rate increases within the next 18 months. Rising interest rates will put these suppliers at a greater financial risk.
Help your suppliers access affordable working capital now
Before the next rate increases, you have a significant opportunity to support your small- to midsized suppliers that need access to cash flow and a lower cost of capital.
Marketplace discounting, available through C2FO, is built on a collaborative relationship between you and your suppliers. No banks. No Fed. No one else controlling the rates.
Suppliers who are participating in C2FO — including ones without access to traditional financing — have immediate access to a lower cost capital before more rate increases go into effect. Suppliers can name a lower rate for working capital than the cost of capital from other sources, such as a line of credit with a variable rate or factoring — both of which will have rate increases, as well as fees.
Supporting your supply chain during future rate increases
More of your suppliers may be able to access financing if (and when) banks loosen up on lending to SMEs when interest rates rise and these loans are more profitable to them. But if bank financing is not affordable, it is not accessible. For SMEs’ with a current cost of capital at 8 percent, more rate hikes could put that APR at double digits.
Offering a marketplace discount option will protect your supply chain in the future by providing access to working capital at a rate your suppliers can afford — without bank fees. That means you can support your suppliers and still net a return for your business.
Naming your return without risk
For corporates invested in low-risk Treasuries, the rate increase means a higher yield in a low-risk market. The Treasury rate is also the basis for most lending decisions. These rate increases could trigger a shift in your treasury strategy, away from higher risk and volatile stocks and a bond market that has an inverse yield when rates increase.
Now may be a good time to consider a shift of investment toward marketplace discounting, which delivers no risk, a return you set, and satisfies an increased need from your supply chain.
For customers who use C2FO, the overall increase in the cost of capital and increase in expected returns for other markets may mean an increase in your expected returns from C2FO. You can choose the rate. You can also choose your goal: a better return on your investment, better financial stability for your supply chain, or both.
In changing conditions, marketplace discounting offers a market you control
The C2FO market operates independently of fluctuations in external markets. One of the strongest advantages with C2FO is the absence of risk and volatility. As a customer, you set a desired return through offering early payment for your own approved payables. Your suppliers also name their rate for access to working capital.
Ultimately, the rates via the C2FO marketplace discounting are driven not by external forces, but through collaboration between you and your suppliers.