High-interest rate environment and its impacts on financing options for the construction industry
As we navigate the global economic situation, characterized by uncertainty and weak growth, it is crucial for businesses to evaluate their readiness for these challenging conditions. In July 2023, the US Federal Reserve FED raised the US federal benchmark interest rate to 5.25-5.5%, the highest level in 22 years, and decided to maintain high interest rates in the latest meeting in September. Concurrently, the Hong Kong interbank offered rate (HIBOR) hit a nearly 16-year high, with a one-month interbank rate of 5.43%. Until the end of September, one-month interbank rate logged at 5.39887%, marking a nearly 2-month high, further exacerbating the financial landscape.
Marie Diron, managing director of Moody’s Global Sovereign Risk Department, highlighted rising interest rates, slowing economic growth in China, and financial system pressure as contributing factors to the economic slowdown.
In this gloomy macro environment, local enterprises in Hong Kong, particularly those in the construction industry, are facing significant challenges in securing financing solutions. The construction industry, being capital-intensive, requires substantial funding; however, the high-interest rate environment increases corporate loan costs and severely impacts cash flow, which is crucial for enterprises with extensive capital turnover needs. For enterprises that urgently need funds to complete engineering projects, what methods can be adopted to solve this problem?
Chart 1 : United States Fed Funds Rate from 2023
Source: tradingeconomics.com
Which options are there in the market for financing on construction projects?
Under normal circumstances, when seeking financial support, enterprises can consider exploring traditional financing solutions. However, obtaining financing from traditional institutions can be challenging due to extensive paperwork, collateral requirements, and additional fees. Furthermore, the market is saturated with many products offered by traditional financing, making it difficult for enterprises to choose from. These financial solutions not only lack user-friendly application platforms, but also fail to cater to the unique requirements of the construction industry. When the products on the market cannot fully meet the needs of enterprises, how should they choose?
An increasingly popular option is factoring. Factoring enables businesses to enhance cash flow by swiftly converting outstanding invoices into usable working capital. This solution helps overcome challenges associated with extended credit terms and delayed payments, ultimately facilitating business growth and progress.
River Chain can help - A tailor-made financing solution for construction industry
At River Chain, we specialize in providing modern financing solutions for the traditional construction industry supply chain.
By applying via the following steps, businesses can unlock immediate cash flow, reduce the risk of bad debt, lower financing cost and improve account receivables management.
First, simply submit your invoice along with any relevant supporting documents. One of our liquidity providers at River Chain will then extend an offer to purchase your invoice at a discounted rate (The discount rate varies with the credit rating on the Debtor, the project and the invoice tenor). Upon acceptance of the offer, you will receive a prepayment amount of up to 90% of the invoice value. Once the customer pays the invoice, we will collect the funds and proceed to pay you the remaining balance after deducting the discount fee charged by the liquidity provider.
River Chain factoring offers to buy your invoices before they are due, and you can enjoy the following benefits: no collateral required, immediate access to capital, high flexibility to choose which receivables to sell and when, and save time and energy for you and your team.
Success story - River Chain is dedicated to support construction professionals to solve cash flow problems
Innovative facade subcontractor whose business has grown 6x from 2021.
Existing credit lines were already secured by properties of the company and its connected parties, and the founder was looking for alternative collateral-free sources of funding to support the working capital demands of his expanding business.
River Chain provided the business with a tailored factoring solution that ensured the company is able to meet its day-to-day capital needs working across multiple new projects.
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