Impact of Rising Interest Rates on Supply Chain

1. Impact of Rising Interest Rates on Supply Chain After several years of low interest rates following the financial crisis, there appears to be a rise in interest rates. While there was a brief rise when the U.S. saw three hikes in 2017 and the Bank of England increased rates to 0.5% in 2017, the rates dropped to an all-time low again during the coronavirus pandemic in 2020. But the Federal Reserve is now hinting that tapering of monetary stimulus is coming along with an interest rate hike that may follow. Higher interest rates can be seen as a welcome development as far as investments are concerned but how do they affect business supply chain finance? The answer to that is, it depends. For large scale cash-rich enterprises, higher interest rates may reflect a supportive economic environment and they will see it as a big opportunity to focus on growth. But for smaller organizations, it may not be too beneficial. In this article, we will discuss how supply chains are impacted by the rising interest rates. What do Rising Interest Rates mean? When the interest rates are low, it means that the cost of borrowing money is also low. It means that there is high competition among lenders to sell loans. They offer lower interest rates as a bargaining tool. On the other hand, when the interest rates are high, it means that the cost of borrowing money is also high. As a result, there are fewer buyers of loans. This means that lenders will raise the interest rates as a bargaining tool. Rising interest rates may ● Make the debt financing more expensive ● Make businesses think twice before borrowing money to fund their operations. ● Deter the investors from taking risks and prefer safer investment avenues like debt instruments with higher returns. How do Rising Interest Rates Affect an Economy? Interest rates can be a crucial factor that can be pulled to manipulate the economy. When a central bank raises interest rates, there are significant aspects that tend to change consumer banks’ behavior. This affects how companies and consumers spend and save.

2. Here are some of the main effects of rising interest rates Boosts Stock Market Higher interest rates may push up the stock market, adding to the wealth of investors. This is a good indicator of how the economy is doing. Along with the market doing well, the native currency of that particular economy is strengthened. Makes Borrowing Expensive When interest rates are high, people look for safe investments which are low in risk. Investing in bonds and government securities becomes more attractive. This drives the prices of stocks down. With the rise in interest rates, borrowing inevitably becomes expensive as financial institutions look to press for higher interest from consumers. Investments are Impacted and Savings are Used The preferable option for many businesses and consumers is to use up some of their savings during a period when interest rates are high. This would mean the percentage of investments in all sectors is likely to go down. Investors lean towards this way more because they find it safer to risk investments when rates are not as high. How Rising Interest Rates Impact Supply Chains? When interest rates are high, the supply chain is affected in many ways. One of the most straightforward ones, is increase in the costs of capital which impacts both ends of the supply chain. Here are a few way more affects. Increase in Commodity Prices Rising interest rates may be a blessing in disguise for companies dealing in commodities like oil, coal, and minerals. They can earn higher profits when the demand for these commodities remains high despite the rising prices. Less Funding for Startups When interest rates are low, more startups are able to get funding. When interest rates are high, there is less funding for startups. When companies get funding, they borrow money from investors. When interest rates are high, the investors charge more interest on the loans taken. When it is difficult for startups to get funding from investors, they have to use their own money to fund their operations. The demand for cash is higher in such situations. This can affect operations of supply chains. Increase in Demand for Cash

3. When interest rates are low, companies have less demand for cash. When interest rates are high, the demand for cash increases. When companies have to repay the loans taken with high interest, they need to generate more cash. This can put pressure on supply chains and can have an impact on operations. How Rising Interest Rates Impact Suppliers and Distributors? Rising interest rates impact suppliers and distributors in the following ways. Increase in Cost of Capital When interest rates are low and suppliers and distributors borrow money to fund their operations, they have to pay less interest on the loans. When interest rates are high, they have to pay more interest on the loans. When more money is borrowed to fund operations, there is less money to repay the loans. As a result, the lenders charge more interest when interest rates are high. Increase in Cost of Goods Sold When interest rates are low, suppliers and distributors charge less money as the cost of goods sold. When interest rates are high, they charge more money as the cost of goods sold. When the cost of goods sold increases, suppliers and distributors pass on the additional costs to customers. This can impact the demand for goods and can have an impact on supply chains. Decrease in Demand for Goods and Services When interest rates are low, businesses have less demand for goods and services. When interest rates are high, businesses have a lower demand for goods and services. When the demand for goods and services decreases, suppliers and distributors cannot sell their products and services. They cannot get payments for the goods or services provided. This can have an impact on supply chains. How Can SCF Help Deal with Rising Interest Rates Supply Chain Finance is the ideal solution for the industry to deal with the rise in interest rates. Here is how it will help. Make a Conservative Financial Forecast

4. When the interest rates are low, businesses can forecast their financials better. When the interest rates are high, businesses have to forecast their financials with caution. While forecasting finances, businesses have to consider the impact of rising interest rates. Use a Long-Term Debt Strategy When interest rates are low, businesses can take advantage of low rates and use long-term debt. Long-term debt has a fixed interest rate and can be repaid over several years. When interest rates are high, businesses have to reduce their debt. When businesses have to repay the loans taken with high interest rates, they can use short-term debt. Short-term debt has a variable interest rate and needs to be repaid quickly. Develop a Strong Liquidity Position When interest rates are low, businesses have a low liquidity position. When interest rates are high, businesses have a high liquidity position. When businesses have a high liquidity position, they can easily repay the debts. When interest rates are low and liquidity is low, businesses use longer payment terms. When interest rates are high and liquidity is high, businesses can pay debts quickly. This helps businesses maintain relationships with their customers. Conclusion The impact of rising interest rates is felt beyond the economy. It can impact supply chains in several ways. When businesses forecast their finances and make better financial decisions, they can deal with rising interest rates better.