It’s important for small and medium sized businesses to understand the latest news around federal interest rates so that they can make informed decisions about financing for their business. Recently, the Federal Reserve has been making headlines regarding rising interest rates. As these rates continue to climb, it may become increasingly harder for SMBs to obtain working capital for their businesses by means of loans and lines of credit. Did you know, though, that receivables finance rates are largely unaffected by these changes? In this blog post, we’ll explore this phenomenon and how businesses can utilize this form of alternative financing to keep their businesses afloat during adverse economic conditions.
As we discussed in our previous blog, the open invoices that a business has on its balance sheet are assets that can be utilized to obtain working capital for their business. The way this works is that a business can sell their receivables at a discount to an approved funder within the Crowdz platform. Once the customer makes the full payment on the invoice, the business then funnels the full amount back to the funder, in which the funder has the opportunity to make a small profit in exchange for the business being able to have access to funds prior to the 30, 60, 90, or even 120-day invoice terms. That discount rate is determined by a series of factors - creditworthiness of the customers, the size of the invoices, the industry in which the company operates, the volume of invoices being sold, and the buyer/seller relationship - all of which are independent from interest rate increases made by the Federal Reserve.
While this may come as good news as it doesn’t seem that interest rates will be cooling down anytime soon, it is important to keep in mind that the discount rate for receivables finance can be influenced by external factors. For example, if a business operates within an industry that’s proving to be unfavorable during an economic downturn, then those receivables may be seen as riskier investments, resulting in a higher discount rate. So while the federal interest rate does not affect the discount rate directly, the overall state of the economy can cause discount rates to fluctuate.
It’s important to compare the interest rates associated with a loan or a line of credit to the discount rate being presented in a receivables finance transaction. It’s also important to understand the goals of the business and the rate at which available funds are to be deployed. Although receivables finance can be utilized during an only-when-needed basis, even if it has a higher discount rate than, say, the interest rate associated with a loan, it may still prove to be the more cost effective option over time due to accrued interest.
In conclusion, while hikes in interest rates can have significant impacts on various financial instruments, receivables finance discount rates may remain largely unaffected. For cash-constrained businesses that are looking for a stable finance option, receivables finance can prove to be extremely valuable during a period of rising interest rates. By understanding the determining factors involved in the discount rate for this alternative financing option, businesses can make informed decisions about their own financing needs without having to worry about the pressure from climbing interest rates in the macroeconomic environment.