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How to Thrive in a High-Inflation, High-Interest Environment?

By Erez Saf - Pymes Capital
President

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By Erez Saf | President - Thu, 10/27/2022 - 16:00

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With the war in Ukraine, the US-Russian relationship deteriorating to Cold War-era levels, and global inflation surging, 2022 appears to be a difficult year. Central banks across the world have substantially increased their interest rates to combat rising prices, including Mexico, where the Central Bank of Mexico increased the interest rate to 9.25 percent on Sept. 29, the highest level since 2005.

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*America Interest Rates and recent changes.
Source: https://tradingeconomics.com/country-list/interest-rate?continent=america

What Does it Mean for the Business? 

The rise in interest rates and inflation presents various financial hazards as well as opportunities for business owners. They can ensure a profit or at the very least reduce losses and dangers by carefully managing and evaluating what is ahead.

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Mexico Inflation Rate source: https://tradingeconomics.com/mexico/inflation-cpi

Cost of Funds 

With higher interest rates, it simply means that money generally costs more, and most debt facilities are more expensive than before. If you have cash on hand, it suffers a reduction in value as inflation rises. Basically, your money will buy less than before. How can a business more effectively handle this financial landscape?

  1. When prices rise, it means money on hand loses value. A good option will be to invest the money to expand and grow the revenue stream. Expand your inventory and make strategic investments or advance purchases of new equipment.

  2. People naturally want to have cash on hand and preserve it for emergencies during times of crisis. It makes perfect sense for an individual, but for a company, $100 now buys more than $100 in three months. If you have money in the bank that isn't being used, put it in a savings program that will earn you a high interest rate for the time being. This will increase your cash flow and slow the gradual loss of your money's worth.

  3. Open debt facilities, loans and other financial instruments that have fixed interest rates can be left untouched and it is recommended to keep the same payments schedule. It is also better not to close them as their value declines while inflation is high.

  4. On the contrary, loans with dynamic interest rates are more vulnerable to any change in the Central Bank of Mexico interest rate, thus will cost more as the interest rate increases. Every business should see if they can close those types of loans, and refinance with different vehicles that are not interest rate dependent.

  5. Consider using advanced financing facilities instead of interest rate-based loans. While  interest-based loan facilities increase in costs as the interest rate grows, there are other advanced financing facilities that are not sensitive to rates. Increasing interest rates and inflation do not affect any of these tools: 

    a. Merchant Cash Advance (MCA) is an emerging business financing solution for B2C and B2B that has gained popularity among many businesses in Mexico with terms that are substantially better than those offered by banks or other interest-based loans.The price is predetermined and can be as little as 15 percent of the money taken. The process is often entirely digital, completed in a matter of hours, and unaffected by fluctuations in interest rates. The dynamic return of MCA, which adapts to the success of business sales, is one of its primary advantages. MCA is better suited to small businesses, whereas bank loans are better suited to big corporations with a steady income.

         b. Factoring, which is the advance financing of issued invoices at a specified discount rate, can be a very useful instrument with an upfront fee of up           to 20 percent of the invoice's entire value to B2B suppliers.

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Rise in Costs and Expenses 

The growing cost of the items and products you purchase are the first direct risk. For instance, as a restaurant owner, your costs for cheese, vegetables, and oil could skyrocket quickly. You should follow a few recommended practices to control this increase:

  1. While vegetables have a short shelf life, oil can last for years. If you have the means and the place to store, any advance purchases and increase of inventory can be valuable and economically beneficial in the future. If you expect an increase in sales toward the end-of-year holiday season,  make your purchases earlier to gain a lower price.   

  2. Diversify your suppliers and add a few more to your shopping list. Competition can keep prices lower for a while longer, and in many cases, price increases do not occur simultaneously for all suppliers.

  3. Concentrate on your primary sources of income and your fastest-growing items or services. Now is the moment to reduce loss-making products and services and make the difficult decisions. The crucial operations established for expansion and income generation should be the entire company's primary emphasis. It's critical to distinguish between reducing recurring expenses and incurring a one-time expenditure that should  boost sales.

  4. Increase prices. Although it's never easy and holds risks, you won't be the first or last person to do it in the current market conditions. As large firms, retailers, gas stations, and service providers raise their prices all around you, your company shouldn't just absorb the cost and expense increases; it also needs to pass them along to the client. An increase of prices along with meaningful communication that softens the objections can be a reasonable step. 

 

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Suppliers

It might come as a surprise, but it is preferable to pay suppliers early and take advantage of the discount percentage on early payments in an environment where inflation and interest rates are high. Many vendors give discounts of up to 5 percent for early payments. By paying early, you may now save the remaining 5 percent, which will earn you interest of roughly 1 percent per month in Mexico.

To conclude, as a business owner, CFO, or accountant, you should be aware of the risks and opportunities in high-inflation and high-interest-rate markets. To put it simply, money on hand loses value, while product costs, expenses and prices rise. Different loans and debt facilities are best situated for this environment, such as factoring, MCA and fixed interest rate loan facilities. Of course, there are still other activities that need to be taken care of. I'm hoping that these tools will help any company thrive in the turbulent times to come.

Sources: 

https://www.reuters.com/markets/emerging/mexico-annual-inflation-rate-hits-87-september-2022-10-07/

https://www.bloomberg.com/news/articles/2022-08-09/mexico-s-inflation-hits-21-year-high-ahead-of-key-rate-meeting?leadSource=uverify%20wall

https://pymescapital.com.mx/resources/

https://criskco.com.mx/el-impacto-de-la-inflacion-en-mexico-al-otorgamiento-de-credito/

Photo by:   Erez Saf

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