How to Manage Corporate Debt During Fed’s “Higher for Longer” Interest Rate Policy

The Fed is done hiking interest rates for now. That doesn’t mean the cost of debt is coming down any time soon. The “higher for longer” stance that Jerome Powell has taken means that managing corporate debt in 2024 will be challenging. This is particularly true for companies with a maturity wall in the near future. Things could get a bit sticky.

Staples is one of those corporations that could be in trouble. They’re paying 7.5% annual interest on bonds that mature in 2026. Unfortunately, those bonds are valued at 82¢ on the dollar right now. That’s not making it “easy” for the office supply giant to operate. Staples’ most recent growth spurt was financed by debt. That option may not be available again.

The situation is manageable if revenue and EBITDA stay healthy. On the flip side, earnings deterioration of any kind could be disastrous for companies that don’t position themselves properly. November is a good time to review your 2024 budget. Does it account for the higher cost of debt that you might need to get through your slow season?

Evaluating the Timeline of “Higher for Longer”

Rumor has it that the Fed will hold interest rates where they are until September of next year, and then do a rate cut. Does that info come from an informed source? Absolutely not. It’s the opinion of economists, strategists, and analysts involved in this month’s CNBC Fed Survey. Roughly half of those folks also believe we’ll be in a recession before the end of 2024.

Everyone has an opinion, but no one knows for certain what the Fed or any of the other Central Banks on a higher-for-longer trajectory will do next. You can realistically assume that rates will stay high through the end of next year. Use that as a starting point for this month’s budget meetings. It might be a good time to consider alternative funding sources.

Corporations facing maturity walls aren’t the only businesses affected by higher rates. The elevated cost of debt funding will prevent many small businesses from borrowing to cover seasonal inventory or expansion. Refinancing existing debt with traditional banks isn’t cost-effective, and credit card rates are higher than loan rates.

Using Venture Debt to Generate Holiday Revenue

Holiday revenue, particularly for retail businesses, can set the tone for the entire year. That revenue comes from sales of inventory that should be fully stocked before the holiday season begins. Many retailers use debt financing to build that inventory. This year, the cost of traditional debt could exceed the potential profits, so SMBs are looking for alternatives.

The prime rate currently sits at 8.50%. SBA loan rates range from 11.5% to 16.5%. Factor rates for merchant cash advances are as high as 1.50. None of these numbers affect the interest rate of venture debt. Interest and fees for venture debt are determined by the lender based on the financial health of the borrower. Fed rate decisions don’t factor into that.

Using venture debt to purchase inventory for holiday sales is a prudent and cost-effective way to make sure the decisions of the Federal Reserve Bank don’t adversely affect your business this holiday season. The additional cash flow can also help you streamline costs and make your operations more efficient, all while not paying excessive interest to banks.  

Cutting Costs Without Limiting Production

Cutting the cost of debt down by using venture debt instead of traditional bank loans is a good first step. You’ll need to follow it up with other cost-cutting moves to make it through 2024. While your cost of capital may be lower with venture debt, others are still paying higher rates. That means prices for supplies and materials will remain high and possibly increase even further.

Buying supplies in bulk now can alleviate some of this concern. You may find that vendors are willing to offer lower prices in return for a higher MOQ. Some providers also do “free shipping” for orders over a certain amount. Look for those deals when ordering non-perishable items like paper goods and office supplies. Just make sure you have the space to store them.

Equipment upgrades are also a cost-cutting move. Modernizing or replacing old machines lowers maintenance and repair costs. It can also improve the efficiency and morale of your human workforce. Office workers tend to be more productive when they have a new computer or copy machine in the office. Upgrade the hardware and the software if you can.  

Preparing Your Company for the Aftermath

Getting an influx of venture debt funds to increase revenue now will get through the first few months of 2024. Using those profits to streamline operations and upgrade or lease new equipment will put you in a great position for the aftermath of “higher for longer,” whatever that might be. Properly managing your debt now will ensure your company is there to see it.  

Imagine it as a game of financial resilience. According to the Administrative Office of the US Courts, in the first half of 2023, bankruptcy filings decided to join the game, showing a spirited increase of 23.3% compared to last year. The Chapter 11 category took the lead with an impressive 68% surge by June. It seems the contestants—companies and individuals alike—are facing off against the formidable opponent of rising debt. It’s a tough match, but let’s hope everyone finds their winning strategy and bounces back soon!

Your company can’t experience the aftermath of the Fed’s current monetary policy if it doesn’t survive the storm that’s coming in the new year. Interest rates from traditional lenders will remain high. Costs for materials and supplies aren’t coming down any time soon. Your survival may be dependent on a cash infusion. Contact Wise Venture today to find out where to get it.