Concerns about accessing credit stoke demand for securities-backed financing

The global interest rate hiking cycle is close to—if not already at—an end.^[1] Yet concerns about accessing credit have reached a ten-year high.^[2] These conditions call for progressive capital solutions like securities-backed financing from EquitiesFirst

Although underlying (core) inflation in the US has ticked up slightly after its decline in the summer, it was not enough of an increase to prompt the Federal Reserve to raise interest rates at its latest rate meeting in early November. And more broadly, global headline inflation is clearly trending down, with the International Monetary Fund (IMF) forecasting a decline from 8.7% in 2022 to 6.8% in 2023, and a further drop to 5.2% in 2024.^[3]

Progressive capital solutions are on the rise

There is now a stark divide in opinion about when and how aggressively the Fed will cut interest rates in 2024.^[4] The Fed itself predicts its funds rate will decline from the current 5.25%-5.5% to 3.9% by 2025.^[5] One thing is clear: no one foresees a return to near-zero rates. Therefore, alternative funding solutions such as securities-backed financing will become an increasingly crucial source of capital to sustain business growth and fund investments.

It also bears emphasizing that the tempering of inflation is a natural consequence of slowing economic growth, with the IMF expecting global GDP expansion to moderate from 3% this year to 2.9% in 2024. That may not seem like a big reduction, but considering the world has not completely recovered from the devastating but short-lived impact of the Covid-19 outbreak in 2020, it is nevertheless significant.

Meanwhile, others have more pessimistic outlooks. Bond giant PIMCO, for example, puts the odds of a global recession over the next 12 to 18 months at close to a “coin flip.”^[6]

Financial conditions keep getting tighter, fuelling need for alternative funding

There is now a growing consensus among economists and policymakers that the global cycle of interest rate rises is likely over.^[7] However, there is still no clarity on when rates might start to come down.^[8] Even if there are no further hikes, the impact of high rates could continue feeding through for several more months, squeezing businesses and consumers.

Strategists at JP Morgan estimate that the impact on GDP from tightening financial conditions takes anywhere from one to two years to be felt. The impact of the 525 basis points of interest rate increases between March 2022 and July 2023 might therefore only fully manifest in the US economy towards the second half of next year.^[9]

Financial conditions in October reached their tightest level in a year, and are expected to continue deteriorating.

The weakness of US regional bank shares is exacerbating the situation, especially for the nation’s 33 million small businesses. These firms, which account for around 40% of jobs in the country, are especially dependent on small and regional banks.^[10] Goldman Sachs estimates that almost 70% of small firms’ commercial and industrial loans are from banks with less than $250 billion in assets, and 30% from banks with less than $10 billion in assets.

When these banks face financial pressure, they are less able to provide loans to their corporate and individual clients, and the loans they do provide are more costly. Data from the National Federation of Independent Business (NFIB) revealed that small businesses paid an average interest rate close to 10% on their short-term borrowings in September. That will almost certainly go higher in coming months.^[11]

These conditions make securities-backed financing especially attractive, since it provides borrowers a relatively low-cost, fixed-interest-rate loan.

Securities-backed financing could assuage soaring funding worries

The NFIB index in September also recorded a sharp increase in the number of small-business owners reporting that they were worried about getting access to credit.^[12]

Previously, there had been no major signs of a sustained deterioration in access to credit since an initial spike in concern following the emergence of the banking crisis in March. It appears, though, that the further tightening in financial conditions caused by tougher bank lending standards^[13] and the renewed surge in bond yields has added to the pressure on firms already struggling with rising borrowing costs.^[14]

Credit squeezes are likely to be especially hard on small- and medium-sized enterprises (SMEs). Several studies, including one by the OECD,^[15] confirm that SMEs, which are more dependent on bank financing, are more adversely affected by credit squeezes than larger companies, which have access to funding from capital markets, trade credit or internal funds.

SMEs are also more vulnerable to changes in credit conditions, such as higher interest rates, stricter collateral requirements, or shorter maturities, because they have less bargaining power, lower credit ratings, and fewer assets to pledge as collateral.^[16] 

The time is ripe for securities-backed financing

With banks tightening lending, SMEs need to cast their funding nets wider, tapping into sources beyond traditional loans. 

In the current environment of high interest rates, tough lending standards and tight liquidity, securities-backed financing from EquitiesFirst presents a compelling alternative to bank borrowing. It offers a flexible, cost-effective and stable non-recourse loan with no restrictions on the use of funds.

Although loans need to be structured carefully, in general risks are limited by the lender’s ability to recover the stocks or crypto pledged as collateral. This enables the lender to offer highly competitive terms and rates.

These are undoubtedly challenging times for SMEs. Fortunately, the time is ripe for securities-backed financing to fill the gap and transition from an “alternative” to a mainstream financing solution for a wide variety SME needs.

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[1] https://www.reuters.com/markets/rates-bonds/end-is-sight-global-rate-hiking-cycle-2023-09-21/

[2] https://www.cnbc.com/2023/09/11/credit-crunch-worries-at-10-year-plus-igh-new-york-fed-survey-says.html

[3] https://www.imf.org/en/Publications/WEO#:~:text=Global%20headline%20inflation%20is%20expected,and%205.2%20percent%20in%202024.

[4] https://www.bloomberg.com/news/articles/2023-11-13/goldman-sachs-morgan-stanley-diverge-on-fed-rate-cut-forecasts

[5] https://www.bloomberg.com/news/articles/2023-11-13/goldman-sachs-morgan-stanley-diverge-on-fed-rate-cut-forecasts

[6] https://www.reuters.com/markets/recession-risk-coin-flip-over-next-year-pimco-2023-09-13/

[7] https://www.ft.com/content/18ccb74f-52c1-4d94-a7f1-5541b134d5c0

[8] https://www.cnbc.com/select/when-will-interest-rates-come-down/

[9] https://www.reuters.com/markets/us/financial-conditions-tighten-again-temper-heated-us-economy-mcgeever-2023-10-25/

[10] https://www.reuters.com/markets/us/financial-conditions-tighten-again-temper-heated-us-economy-mcgeever-2023-10-25/

[11] https://www.reuters.com/markets/us/financial-conditions-tighten-again-temper-heated-us-economy-mcgeever-2023-10-25/

[12] https://www.bloomberg.com/opinion/articles/2023-10-11/cpi-clash-of-inflation-expectations-as-tighter-credit-bites

[13] https://www.axios.com/2023/08/14/banks-not-lending-svb-inflation-fed, https://finance.yahoo.com/news/banks-expect-to-tighten-loan-standards-for-rest-of-2023-fed-190303122.html

[14] https://www.imf.org/en/Blogs/Articles/2023/10/10/higher-for-longer-interest-rate-environment-is-squeezing-more-borrowers

[15] https://www.oecd.org/finance/SMEs-Credit-Crunch-Financing-Difficulties.pdf

[16] https://thefintechtimes.com/6-ways-for-smes-to-beat-the-credit-squeeze/