PLANNING FOR HIGHER INTEREST RATES AND SUPPLY CHAINS

Planning for Higher Interest Rates and Restricted Bank Lending: The Impact on the Supply Chain

Jason Busch

- August 25, 2015 8:00 AM |

Categories: Supply Chain Finance | Tags: rising interest rates

While the recent market correction may call into question the Fed’s expected trend to raise interest rates, it is inevitable that interest rates are going to climb in the coming years – the question is “when” and not “if.” But whether a rise in rates is combined with further restrictions on lending to small (read: risky) businesses due to the need to maintain more conservative lending standards – thanks to the latest Basel III restrictions – is perhaps just as important a question to ask.  
Certainly, even a double whammy of higher interest rates combined with restrictive bank lending could have a significant impact on the ability of suppliers to access capital on reasonable terms. In the coming weeks on Trade Financing Matters, we’ll explore the potential impact of these challenges as well as potential approaches to proactively reduce supply chain risk.  Today, we’ll start by tackling how such a climate could impact suppliers – and procurement.
Either or both of the above-described events could have a cascading effect on supply chains:

• Many suppliers will face additional margin pressure as bank and non-bank lending options become more costly
• Smaller businesses may find it more difficult, generally, to access capital through traditional lending options
• Vendors will cut corners in areas that may not create additional risk at first,  such as by reducing inventory, but will lower the ability of supply chains to “flex” in times of increased demand
• Owners and management teams at vendors may be forced to make short-term decisions to access capital at higher rates that could have long-term negative ramifications – but that might not show up in a credit score
• The risk of vendor bankruptcy is likely to rise at all tiers within the supply chain, but especially lower-tier suppliers
• The most sophisticated buying organizations with access to rich supply risk information will be able to take action more quickly than others, leaving the majority of customers of at-risk vendors with fewer options in the event of a supplier insolvency or financially-based supply disruption

Given this context, what types of actions can procurement organizations proactively take to mitigate potential risk factors? A number comes to mind – and implementing trade financing programs, especially those that leverage technology, to provide options to suppliers is high on the list. But other types of proactive investments are important as well. These include not only supply risk management, supplier management and supplier information management solutions and surrounding content to provide continuous visibility and intelligence into the condition of suppliers but also payment analytics, spend visibility and even network-based solutions that bring additional benefits.
As this series continues, we will turn our attention to how procurement (as well as accounts payable treasury and supply chain team) can become more proactive in rising to the interest rate and bank lending challenge.