Impact on Rising Interest Rates on Supply Chains

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Last week the US Fed Reserve enacted its second consecutive 0.75 percentage point interest rate increase as it seeks to tamp down runaway inflation without creating a recession. Given the abnormally high inflation, continuation of aggressive rate hike by the Fed and other global monetary authorities has been expected, however financial markets have also more or less priced in the same.

Worthy to note that a large part of the current global inflation scenario is supply sided, and raising interest rates to tame demand and therefore inflation may not be the only solution, as high prices have been driven mainly by supply chain shocks.

Spike in commodity prices due to the war in Europe, geopolitical uncertainties, lingering impact of the pandemic on the global supply chain, logistic problems and shortage of microchips are resulting in flare inflation in most countries. Global manufacturers and suppliers have been unable to produce and deliver goods to consumers efficiently causing further demand-supply gaps.

Businesses are facing issues of restricted or high-cost access to capital with suppliers passing the high costs to the buyers, causing further rise in cost of goods. Even if a supplier attempts to absorb costs within their process, paring back inventory levels, it leads to further disruption down the line in the supply chain.

Non-traditional sources of capital may become more important in this higher rate environment. With the cost of funding from traditional lenders likely to rise, companies may have more to gain from looking at alternative providers – for example, by adopting a supply chain finance solution.

Supply chain finance can help companies address the pressures of a rising rate environment in different ways. It can reduce the cost of capital for smaller suppliers. This means that the funding constraints brought about by higher interest rates can be mitigated – reducing both the risk of disruption for parties up and down the chain, and the likelihood that suppliers will ramp up their prices. It can also bring direct working capital benefits. By enabling you to pay invoices later than you would otherwise, supply chain finance means you can free up your own working capital and achieve greater stability, without adversely affecting your suppliers. Conversely, cash-rich companies may be able to put their excess cash to work by taking advantage of opportunities such as early payment discounts.

We at Alpha Bridge have partnered with an array of alternate lenders, who specialize in providing supply chain financing and working capital solutions which are flexible, automated and custom made as per any business requirement. Given the inflationary and rising interest rate scenario, it is prudent for businesses to opt for these alternate solutions, that would enable them and their suppliers to have an access to low-cost, optimal and faster financing solutions.

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