A Three-Point Financing Checklist for Private Business Owners

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1. Determine if Fixed or Floating Rate Credit Facilities Make the Best Sense
Some business owners prefer to fix their borrowing costs to minimize expense uncertainty.
Refinancing with fixed rate borrowings may make more sense for companies operating in Eurozone countries where debt dynamics and spreads may be under more pressure.

Other business owners may prefer variable rate facilities, especially if they think the slowdown in advanced economic activity will cause central banks to cut rates. While our government bond forecasts for the US, UK and Eurozone typically predict rate peaks in the third or fourth quarters of this year, we note that data-dependent central banks could surprise with bigger rate hikes if inflation beats expectations or remains persistent. raised.

2. Review intercompany credit agreements to identify and address vulnerabilities
In our research paper Should founders fear a rate hike? we have explained why the quality and durability of capital are important as well as its availability.

For many business owners, particularly those who favor financing through retained earnings, intercompany credit agreements with suppliers, customers and other stakeholders are the financing arrangements most sensitive to changes in macroeconomic and monetary policy settings.

In the event of a potential downside risk to peripheral Europe’s growth and financing conditions, business leaders would do well to identify the negative effects on business-to-business credit. The terms of these agreements should be reviewed regularly to ensure that they support ongoing relationships while prudently managing credit risk.

A related (but often overlooked) topic is asset protection. Entrepreneurs might consider how they can protect their business capital and their own against possible credit losses or higher financing costs.

For more details, please see our article Should Business Owners Strengthen Their Asset Protection?

3. Take a fresh look at currency exposure and ways to manage it
Changes in monetary policy affect the real economy through borrowing costs and exchange rates.

In our recent article Should founders manage their currency exposure? we noted that considerable uncertainty around the geopolitical outlook, costs and global interest rates in the second half of the year could increase the attractiveness of more active management of corporate (and individual) currency exposure.

We continue to suggest three tips for founders and other entrepreneurs to decide if active currency management makes sense:

  • Regularly review currency risks and all natural trade hedges.
  • Develop a systematic currency management plan.
  • Consider currency opportunities as well as currency risk management.

Conclusion
Major central banks continue to raise interest rates to bring inflation back to medium-term targets. Higher rates influence the cost of capital. Other factors, such as Russian energy flows and national debt dynamics, may imply higher financing costs for businesses and greater uncertainty.

In Europe, bank lending standards are tightening, demand for corporate loans is slowing and bank financing conditions are more difficult. Although we do not expect a freeze in loan flows, we believe that entrepreneurs would be better served by re-examining their financing options.

Read the full report, Should business owners review their financing? (July 27, 2022), which also answers the questions “What are the major central banks doing? and “How do changes in monetary policy influence entrepreneurs?”

Main contributors: Matthew Carter and Dean Turner

This content is a product of the Chief Investment Office of UBS.


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