In today’s highly volatile and uncertain market construct, indelibly marked by slowing economic growth, stormy foreign exchange market, hostile interest rate regime and globally inducing pressure, staying afloat, and thriving requires business owners and managers to think holistically about their business and funding strategies.
The downward revision of Ghana’s economic growth by international partners is a signal for management of companies to focus on efficiency and cost control. Exploring new markets, diversifying products or services, and investing in innovation can help maintain or boost growth even in challenging times.
This article explores the importance of considering your entire funding spectrum, encompassing short-term and long-term financing options, equity, debt, and capital markets before setting sail with any financing option you may elect to implement.
We will also discuss strategies for managing debt in a high-interest rate environment, keeping in mind the global economic backdrop, and specific challenges such as debt sustainability concerns.
When markets are upside down and financing is constrained, effectively diagnosing the purpose of funding is critical. There is the possibility of misconstruing a longer-term funding need as a shorter-term funding need as well as applying a debt solution over a challenge that requires patient capital.
In evaluating funding needs and settling on the type of solution required, we believe it is worthwhile working through the below considerations.
Understanding Your Short-Term Funding
Business owners should pay close attention to their short-term funding needs and aim to deeply understand same. The high-interest rates, such as the US Federal Reserve’s rate at 5.50%, Bank of Ghana’s monetary policy rate at 30%, and Ghana Reference Rate at 31.09%, necessitate prudent working capital management. This includes optimizing cash flow, reducing unnecessary expenses, and exploring alternative short-term financing options, such as lines of credit or trade credit agreements while strongly shortlisting Commercial Paper issuance options in the debt capital markets.
Repositioning Your Long-Term Funding
Long-term funding is crucial for growth and sustainability. Business owners should evaluate their capital structure, considering the right mix of equity and debt. In a volatile environment, diversification is key. While debt can be cost-effective, too much of it can be risky especially in an era of soaring interest rates. Equity, on the other hand, provides stability but may dilute ownership. Striking the right balance is vital. Potentially, it may be the right time to dilute the ownership of the business with partners who understand and believe in the purpose of the business. There are clear wins to annex from strategic or financial investors who fit the profile of your company.
Be Proactive Around Debt Management in High-Interest Rate Environment
Managing debt in an environment with interest rates averaging over 30% requires a strategic approach. Here are some tips for contemplation:
- Refinancing: Explore opportunities to refinance existing debt at more favourable terms, locking in lower fixed rates if the view supports interest rates declining within the short to medium term, as well as negotiating for longer tenors with funding partners.
- Asset-backed financing: Consider securing debt with valuable assets to reduce risk and secure lower interest rates. It might also be the time to explore packing receivables from proven sources/debtors and approaching a lender to release cash today to sustain the business.
- Hedge interest rate risk: Use financial instruments, like interest rate swaps and cross currency swaps, to mitigate the impact of rising rates on existing debt. Engaging your Global Markets partners for more on this sooner than later may be a viable step to take in these times.
Explore Capital Markets and Other Alternative Funding
In volatile times, capital markets and alternative funding sources can provide much-needed flexibility. Low-hanging fruits include exploring a bond issuance or commercial paper issuance in local currency. Post the debt exchanges in Ghana, we have seen cash build-up in pension funds and asset management firms that may be looking for homes. A compelling credit story has the potential to elicit support from non-bank capital providers who can go longer on tenors and subscribe to more innovative structures. We recommend that you consider this option as a complementary funding source in these times. Further, management of businesses may want to shortlist private equity, IPO, or crowdfunding for equity financing if required. As Environmental Social and Governance-themed (“ESG”) financing gains momentum globally, it has become necessary for businesses to explore viable ways to embed sustainability considerations in their businesses, while benefiting from a wide array of funding options including green bonds, green loans, sustainability loans and bonds, among others. In the years ahead, we believe ESG themes will take up more space in funding considerations in Ghana.
In today’s rather unpredictable business environment, business owners must view their funding needs through a holistic lens. Balancing short-term and long-term funding, considering the equity-debt mix, and evaluating capital market options can help mitigate risks and seize opportunities. Furthermore, addressing challenges like high interest rates, foreign exchange volatility, slowing GDP growth, and debt sustainability concerns demands strategic planning. By adopting a comprehensive approach to funding, business owners can adapt and thrive amidst the turbulence of our times.