Interest rates are everywhere, and they truly move the economy and how business liquidations and surplus generation are influenced.
But how does it work?
As rate rises, companies face increased borrowing costs. This also includes tighter cash flow and higher inventory carrying expenses. In simple words, it all becomes more expensive and tougher to work with.
However, this is only for overall companies and businesses. These pressures often trigger asset liquidation and surplus sales. This is when you enter and can get businesses inventory as you work through their sales.
As they try to scramble to manage debt and operational expenses, you can offer great solutions for less pressure and fewer losses.
Understanding this relationship is critical for navigating the surplus industry in today’s volatile economic climate.
But more than anything, to make your business a success thanks to the control you get over the forecast and changes.
At Coastal Surplus Solutions, we understand the stress behind all projects and how you have to work on finding the best moments.
Hence, we have been working on understanding interest rates, how they work, and providing this knowledge to our clients.
How Rising Interest Rates Drive Business Liquidations
More than being a single formula, it is about the specific type of changes they bring:
- Increased Borrowing Costs and Cash Flow Strain
Higher rates always make the cost of servicing debt raise. It comes naturally, and it is more of a regular metric to follow.
This is why businesses with variable-rate loans or credit lines see immediate payment increases. This squeezes profitability and liquidity.
If you are a company paying 5% interest on a $500k loan, you would see annual payments jump by $25.000 if rates rise to 10%.
It is a process and strain that is not often through about. As mentioned by Savage Silk, all this potentially forces distressed businesses into liquidation to settle obligations.
This is when you come in and can offer great options around liquidation and moving all their inventory.
- Lower Business Valuations
Rising rates reduce business valuations through the discounted cash flow (DCF) model.
Overall, higher discount rates diminish the present value of future earnings, making acquisitions less attractive. With valuations depressed, owners of struggling businesses may opt for liquidation over sale, accelerating asset disposition.
This is when you want to consider the differences between it all and how you can work on the assets and sales.
- Reduced Consumer Demand
Higher rates often mean it comes with weaker sales. This is because people tend to be affected in all areas.
While individuals may not see a massive change in their personal interest rates, all other areas are being influenced by them. As a result, it is important to work around how sales are performing based on the customers.
Weaker sales, of course, leaves companies with unsold inventory and diminished revenue. It all calls for liquidation to try to reduce losses.
What About Interest Rates and Surplus Generation?
Interest rates influence it all, including inventory holding expenses.
For instance, a business could be holding $1 million in inventory at a 5% interest rate. Then, the business incurs $50.000 annually in financing costs.
Of course, if rates go up to 10%, the payment goes up to $100.000 annually.
The way companies want to adapt to this surplus and interest situation is by going over just-in-time stocking strategies and liquidate any excess in no time.
Always work carefully with all elements involved. This includes supply chain optimization, learning about sector-specific impacts, and much more.
Consider rates based on what you can finance and how to move inventory through your liquidation. If you are the liquidator or reseller looking for surplus goods, Coastal Surplus Solutions can help you in this endeavor.
Contact us today and learn about all the details through this interest rate journey.
