LIBOR – How can Supply Chain Finance Reduce the Uncertainty of Interest Rate Changes?
What is LIBOR and is it important?
Libor, which is short for the London interbank offered rate, is a published daily interest rate benchmark or the basis for many other interest rates. If you have heard of it, that might be because it was at the center of a market-manipulation scandal that resulted in jail time for some traders and billions of dollars in fines for many banks. The result is the financial markets are preparing for a world without LIBOR.
There are other important financial benchmarks, of course — the Federal Reserve’s fed funds rate and the yield on the 10-year Treasury note among them — but LIBOR has emerged over time as the dominant rate for determining interest payments on almost all adjustable-rate financial products. Most methods of external funding are subject to changes in LIBOR rates – including lines of credit. There are some exceptions, such as cash on the balance sheet, fixed-rate loans or loans that are hedged with derivatives. But, for the most part, all variable rate financial sources are susceptible to changing LIBOR rates.
How can businesses reduce their cost of capital with supply chain finance?
Supply chain finance comes in different shapes and sizes but overall it can be used effectively to reduce a company’s cost of capital. The cost of supply chain finance is passed onto the suppliers who pay a nominal discount for an early-pay option.
Companies that can partner with supply chain finance lenders can not only reduce the cost of capital but can also increase their trade payable cycle and increase efficiency in the accounts payable department. Technology has paved the way for small to medium-sized businesses to take advantage of the benefits of supply chain finance. Supply chain finance is a winning strategy for companies to gain a competitive advantage over their competitors.
Robyn Barrett is the founder of FSW Trade Finance, an independently owned and operated supply chain financing firm. Robyn is focused on helping small to mid-sized business-to-business companies secure funding that may not otherwise be available. By giving them access to working capital needed to grow, FSW Trade Finance is helping shape the business community.