How to deal with company assets during the interest rate hike cycle? How does the company allocate funds?
The U.S. Federal Reserve raised interest rates by 0.75% for the third time in a row in September this year. In the early days of business startups, companies usually need payment for goods to obtain capital turnover. When the interest rate rises, it will increase the repayment pressure of the company. How should SMEs deploy in the face of the interest rate hike cycle? Where can company funds be placed?
The US Federal Reserve raised interest rates for the third time in September this year by 0.75%, increasing the range of the federal funds rate to 3% to 3.25%, and the interest rate level rose to a new high since 2008. The number was raised from 3.4% to 4.4%. After all, Hong Kong has been in a low interest rate environment since the financial tsunami. Enterprises, especially emerging start-ups and SMEs, have never faced such a situation. When interest rates are rising rapidly, the current interest rate hike cycle will have a huge impact on enterprises. That said, there are many risks to be aware of.
Risks of interest rate hikes faced by SMEs
Business Repayment Risk
The most direct impact of interest rate hikes on SMEs is definitely borrowing. In the early days of starting a business, companies usually need loan payments to obtain capital turnover, and many companies use loans to temporarily tide over the difficulties during the epidemic. However, when the interest rate rises, it will increase the repayment pressure of the company, so it will have a great impact on small and medium-sized enterprises and start-up enterprises.
Under the government’s measures such as guaranteeing employment, many industries have benefited from policies such as the postponement of rent recovery. However, once the policy period ends, it will be replaced by the pressure of one-off rent reminders. Small and medium-sized enterprises can withstand such storms, and the industry faces the risk of arrears or even bankruptcy, which will follow.
Risk of Owning Property
At the same time, banks in Hong Kong successively announced an increase in the prime rate (P), the first increase in P since the end of September 2018. If calculated on the basis of every 5 million yuan loan, the monthly payment will increase by 318 yuan. Therefore, if you hold a property that is still making contributions, the interest expense of the enterprise will also increase; and the interest rate of non-residential properties will be higher than that of residential properties, so the burden of payment will increase significantly.
Currency Exchange risk
The U.S. interest rate hike has resulted in a strong U.S. dollar and weakened other currencies. Fortunately, the Hong Kong exchange rate has benefited from the linked exchange rate and has not been greatly affected. However, for enterprises engaged in export-related business, businesses denominated in foreign currencies should pay attention to exchange rate risks.
SMEs Remedies
Despite the interest rate hike cycle, the government loan interest rate remains low. The SME financing guarantee program covers 80% and 90% of the credit guarantee products, and the interest subsidy for each loan can be up to 3% for a period of one year. For 100% credit guarantee products, all loan interest and principal repayments are extended to one year.
The SME Financing Guarantee Scheme was launched by The Hong Kong Mortgage Corporation Limited. The purpose of the scheme is to assist SMEs and unlisted enterprises to obtain financing to meet their business needs. Eligible enterprises participating in the scheme can obtain 50, 60 or 70% of the credit guarantee provided by the Mortgage Corporation when their loan is approved by the participating lending institutions. The maximum total loan amount is 12 million yuan. However, the borrower must have been operating in Hong Kong for at least one year on the date of the application.
As for those who want to apply for the 80% guarantee, the maximum loan amount will be increased from 15 million yuan to 18 million yuan; under the 90% guarantee, the maximum loan amount will be increased from 6 million yuan to 8 million yuan; 100% credit guarantee products will be increased from 2 million to 400 yuan 10,000, and the planned application deadline has been extended to June 2023.
How does the business dispose of funds/hedge corporate risk?
In the post-epidemic era, enterprises may have cash in hand, whether from borrowings or their own accumulated capital, or want to obtain funds for transformation. In this case, where the funds should be invested becomes a problem that enterprises need to face. the subject.
Investing in new business/transformation?
Investing in a new business/transformation is a great way to dispose of your funds, just to “roll the money” on your accumulated funds. However, the choice of investing in new businesses should be very cautious, especially since the epidemic is over, many industries have sprung up like mushrooms after a rain, and there are also many competitors. In Hong Kong, a small market, investing in new businesses and transformation Always think twice. If you invest too much in some businesses in the early stage, you have to be careful about getting stuck in the mud. It is the best policy to control your investment funds and operate carefully. Otherwise, under the pressure of interest rate hikes, the pressure of repayment will increase, and the investment may not be worth the gain.
Cash is king?
Indeed, in the current fast-changing environment, cash in banks/term deposits, etc. can get higher interest, and it is very safe. However, one thing to pay attention to is whether the interest placed in the bank can offset the company’s interest expenses, such as loan repayment, mortgage repayment, rent, etc. It’s also a good idea to invest when you have enough ammunition or when your company is stable.
Fixed assets?
Investment in non-residential properties is not a recommended practice during a period of rising interest rates and a downturn in the property market, especially since there is still no room for improvement in Hong Kong’s shop rents and office rents. Not impressive. Therefore, if you have extra funds, you can buy a shop/office building for your own use, etc., but it is not a good time to invest.
Invest in stocks?
Under the interest rate hike cycle, the impact of interest rate changes on the stock market is comprehensive, and all sectors are affected. Raising interest rates will drain market liquidity and directly affect the motivation of investors to buy and sell stocks, but if they only hold cash, they may underperform inflation. However, high dividend stocks not only have better resilience and relatively reasonable valuations, but dividends can also help increase the return of the investment portfolio. However, due to the limited funds of small and medium-sized enterprises, the risk of investing in stocks is too great, and it is okay to invest in a small part of the company, but it is not desirable to focus the company’s funds on stocks.
All in all, SMEs should manage their financial expenses during the interest rate hike cycle, and should carefully measure their repayment ability when borrowing.
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