U.S. consumer inflation, excluding energy and food, rose to a 40-year high in September, a sign that strong price pressures are persisting across the economy.
The U.S. Labor Department on Thursday said that the core consumer-price index, which excludes volatile energy and food prices, rose 6.6% in September from a year earlier, the biggest increase since August 1982.
The inflation report is likely to prompt the Federal Reserve at its November meeting to raise interest rates by another 0.75 percentage point and increases the likelihood that it will continue raising interest rates at the same pace this year and could raise rates even higher next year.
The steady march of interest rate increases has prompted many small vendors to turn to alternative funding that can keep their cash flowing while limiting inflation risk, said Alistair Baxter, head of receivables finance for Taulia, which provides financing to small companies that deliver into larger companies.
“Policymakers are looking for greater levels of monetary tightening, so that’s going to create real challenges for businesses,” Baxter said. “If you’re a treasurer today, you’re facing the highest cost of borrowing. Interest cost or debt service coverage cost is more or less at a generational high.”
Climbing borrowing costs squeeze vendors that typically ship their goods but don’t receive cash payments for days or even months. Meanwhile, vendors have their own costs to pay, such as payroll, supplies, debt service, while inflation eats away at the cash they are due. In addition, the risk of a recession is making the ability to quickly translate receivables — money that is due from customers — into revenue, even more critical.
To support working capital — funds used to keep operations going — businesses could increase their revolving credit, which is similar to a credit card. “That creates other problems,’” Baxter said. “You don’t want to increase your debt burden when you’re heading into a recession.”
Instead, many vendors are turning to those that provide working capital by buying vendors’ receivables at a slight discount. Taulia expects receivable buying to increase in the fourth quarter, when companies want to report leverage ratios that reflect healthy cash balances at year end.
Although buyers purchase the receivable at a discount, vendors avoid waiting to be paid with money that is losing value every day. For example, if inflation is hovering around 8.5% to nine percent and it takes 90 days before a vendor receives the cash from its customers, then the receivable is worth 2.13%-2.25% less.
“If you sell your receivables for anything less than 2.13%, over that period, you are essentially mitigating the impact of inflation on your profit margins in real terms,” Baxter said.
Additionally, selling receivables allows vendors to offload the risk of having a customer default on payment or go out of business altogether. “As you go into recession, that’s when insolvency levels begin to go up,” Baxter said. “So, ultimately working capital has a massive role to play here.”