January 3, 2016
With the recent increase in interest rates, working capital management and supply chain finance is even more important to manage properly. Robert Kramer, VP, Working Capital Products & Solutions at PrimeRevenue, shared with the LTP team his insights on the way the interest rate hike impact supply chain finance.
The underlying principle of supply chain finance is decoupling the buyer’s payment date from the supplier’s collection date. Supply chain finance allows a buying organization to optimize its payment terms to its suppliers and improve its working capital. At the same time, it gives the option to its suppliers to receive early payment based on attractive financing rates. The funding rate is based on the buyer’s credit worthiness or rating rather than on the supplier’s.
Explaining the way interest rate affects suppliers, Mr. Kramer said, Interest rates reflect the cost of money which is an input into production. In isolation, rising rates negatively impact corporate cash flow in the same way as a rise in any other input, such as labor or commodity prices. Further, with a greater percentage of both corporate and consumer cash flow going to interest expense, companies may experience reduced sales.
One of the key actions companies take when rates rise, as Mr. Kramer shared, is to focus more closely on working capital management, the value of which is directly tied to the cost of capital. By reducing the amount of cash tied up in working capital, companies can reduce the cost of maintaining that capital and free up cash to pay down more expensive debt.
However, the recent decision by the Federal Reserve to increase the Fed Funds rates by a quarter of a percent is unlikely to meaningfully impact interest rates, as Mr. Kramer shared.
Explaining the way the Fed Funds rate works, Mr. Kramer continued, The Fed Funds rate is an overnight rate charged to banks for money held at the Federal Reserve. It has only a slight impact on short term rates and it has virtually no impact on long term rates. Ultimately, interest rates are determined by inflation and economic growth, with the former in check and the latter stubbornly low.
That said, interest rates are at historic lows with the current 30 day LIBOR rate at 0.61% vs an average of nearly 4% over the last 25 years. So while the recent Fed decision may not have the impact that many fear, rates will eventually rise when inflation or more substantial economic growth return. It therefore remains prudent for companies to prepare themselves by focusing on effective strategies such as working capital management.
Supply chain finance aims to improve the financial efficiency of the supply chain and substantially reduce the working capital of both buyers and suppliers. It allows buyers to extend payment terms while providing suppliers access to better financing rates. It creates a true win-win situation for the buyer as well as for the supplier.
PrimeRevenue is the acknowledged leader in supplier financing, managing and optimizing cash flow for more than 20,000 customers in over 70 countries supporting 30 currencies, as company states on the official website. The solutions offered by PrimeRevenue`s OpenSCi product suite allow clients to involve their strategic trading partners to create tangible value for the entire value chain.
Last year, more than $120 billion in supply chain transactions was processed through PrimeRevenue platform. The company has developed a deep understanding of financial supply chains and has quickly become the leading solution provider in financing solutions for businesses. PrimeRevenue was listed by the LTP team among the 9 supply chain finance companies in Asia as well as among 9 supply chain finance companies in the US.