Business owners today face many direct challenges due to the economy.
Major central banks continue to raise interest rates to bring inflation down to medium-term targets. Higher interest rates affect the cost of capital. Other factors, such as Russian energy flows and government debt dynamics, may mean higher financing costs for companies and greater uncertainty.
In Europe, bank lending standards are tightening, corporate demand for credit is declining and bank funding conditions are becoming more difficult. While we do not expect lending to freeze, we believe entrepreneurs would be best served by reassessing their financing options.
Business owners would do well to check the availability, costs and terms of their financing agreements. Even if entrepreneurs don’t use debt to fund operations or long-term investments, it’s highly likely that parts of their supply chain will. In times of economic uncertainty and monetary tightening, it can pay off to identify vulnerabilities early and prepare for the worst.
There are three points business owners can consider to review their funding in this volatile economy:
Consider whether fixed-rate or adjustable-rate credit facilities make the most sense. Some business owners prefer to fix their borrowing costs to minimize uncertainty around spending. Refinancing into fixed-rate debt may make more sense for companies operating in eurozone countries where debt dynamics and spreads may come under more pressure.
Other business owners may prefer floating rate facilities, particularly if they think the slowdown in advanced economic activity will prompt central banks to cut interest rates. While our government bond forecasts for the US, UK and the Eurozone generally expect peak interest rates in the third or fourth quarter of this year, we note that data-driven central banks could surprise with stronger rate hikes if inflation beats expectations or remains persistently elevated.
Re-examine corporate credit agreements to locate and eliminate vulnerabilities. For many business owners, particularly those who prefer financing through retained earnings, intercompany loan arrangements with suppliers, customers and other stakeholders, these arrangements are most sensitive to changes in macroeconomic and monetary conditions.
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In the potential risk of deteriorating growth and financing conditions in peripheral Europe, entrepreneurs would do well to identify negative implications for intra-group lending. The terms of these agreements should be reviewed regularly to ensure they support ongoing relationships while prudently managing credit risk.
A related (but often overlooked) topic is asset protection. Entrepreneurs might consider how to protect their company’s capital and their own from potential credit impairments or higher financing costs.
Take a fresh look at currency risk and ways to manage it. Changes in monetary policy impact both the cost of credit and exchange rates on the real economy.
We continue to give founders and other entrepreneurs three tips for deciding whether active currency management makes sense: Regularly review currency risks and all natural business hedges. Create a systematic currency management plan. Consider currency opportunities as well as currency risk management.
Major central banks continue to raise interest rates to bring inflation down to medium-term targets. Higher interest rates affect the cost of capital. Other factors, such as Russian energy flows and government debt dynamics, may mean higher financing costs for companies and greater uncertainty.
In Europe, bank lending standards are tightening, corporate demand for credit is weakening and bank financing conditions are becoming more difficult. While we do not expect credit flows to freeze, we believe entrepreneurs and business owners would be best served to reassess their financing options.
Eric Thompson is a financial advisor at Thompson, Singor & Cimmino, UBS Wealth Management USA in Norfolk. Contact him at [email protected]
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