The burden of interest rate hike on small and mid market companies in the U.S

The last time the U.S. economy grew at the fastest pace was in 1984 and since then its been hot and cold.

The recent Ukraine situation is passing cold shivers to many economies and as the war further extends, it will be increasingly hard to insulate the country’s economy.

While in the past, the U.S. economy has shown tremendous resilience, the economy started seeing the brunt and is about to slam a rising wall made up of high inflation, price rises, high cost of funds, and more.

The Federal Reserve’s number one priority is to keep the U.S. economy stable and drive sustainable growth and the number one job is managing monetary policy which includes controlling the supply of money. While they have multiple levers to manage, the interest rate is one of the key ones.

Though on a lower base, recently FED announced its biggest interest rate hike in decades to tackle the inflation. While the goal may be to increase the cost of credit, a higher interest rate makes loans more expensive for both businesses and consumers.

On the business front, the burden is felt most by small and mid-market companies.

•  Increase in input cost
• Disruption in the supply chain
• Delayed payments from customers
• Depleting working capital buffers

and more….

Tough situations gives heroes the opportunity to rescue, in the current scenario, CEOs and CFOs are the leads. It is like Keanu Reeves and Sandra Bullock in the movie “Speed” navigating the bus and also managing the safety of the passengers.

With price increase being inevitable and so is the disruption in the supply chain with cascading impact on receivables, cash flows, and sustainable capital, there will be a need to strategize and re-draw the execution plans that include –

1. Being very tough costs.
2. Removing inefficiencies
3. Improving productivity of employees
4. Being proactive on customer credit checks and defaults
5. Focussing on sales to grow.

Small businesses draw on both commercial and personal credit lines, and mid-size businesses rely on –

(i) a credit line with a high integer cost or

(ii) invoice factoring at a steep discount.

Irrespective of the size of the business, the lowest cost of funds will continue to come from efficient management of receivables. Reduction in the Days Sales Outstanding ( DSO ) and managing it effectively is the need of the hour.

Automating receivables with integrated payments can bring substantial gains and ROI in less than a year. It will help businesses achieve –

• Sales / Collection team productivity
• Customized automated reminders
• Better invoice to cash life cycle management
• Invoice supporting document management
• Invoice dispute management
• Monthly and weekly cash forecast
• Maintain payment and communication history
• Automated reconciliation reducing manual error and revenue leakage

and more.

In these tough market situations, automating Accounts Receivables will continue to be the best lever to get access to cash at the least cost.