CIO recommends business owners regularly review currency exposures and any natural business hedges. (UBS)

1. Consider whether fixed or floating rate debt facilities make most sense
Some business owners prefer to fix their borrowing costs in order to minimize uncertainty around outgoings.
Refinancing to fixed rate borrowings may make more sense for businesses operating in Eurozone countries where debt dynamics and spreads may come under more pressure.

Other business owners may prefer floating rate facilities, especially if they believe the slowdown in advanced economic activity will lead central banks to cut rates. While our government bond forecasts for the US, UK, and the Eurozone generally expect peak rates in the third or fourth quarters of this year, we do note that data-dependent central banks may surprise with sharper rate rises if inflation beats expectations or stays persistently elevated.

2. Review inter-company credit arrangements so identify and remediate vulnerabilities
In our research paper Should founders fear rising rates we explained why the quality and sustainability of capital matter as well as its availability.

For many business owners, especially those that favor funding through retained earnings, intercompany credit arrangements with suppliers, customers, and other stakeholders are the most sensitive funding arrangements to changes in macroeconomic and monetary policy settings.

In the potential risk case that peripheral European growth and funding conditions deteriorate, business owners would do well to identify negative effects on intercompany credit. The terms of these arrangements should be regularly reviewed to ensure they support ongoing relationships while prudently managing credit risks.

A related (but often overlooked) topic is asset protection. Entrepreneurs might consider how they can shield their firm’s capital and their own from potential credit impairments or higher funding costs.

For more details, please see our paper Should business owners boost their asset protection?

3. Take a fresh look at currency exposure and ways to manage it
Monetary policy changes pass through to the real economy through both borrowing costs and foreign exchange rates.

In our recent paper Should founders manage their currency exposure? we noted that considerable uncertainty around the second half outlook for geopolitics, costs, and global interest rates may increase the appeal of managing corporate (and personal) currency exposure in a more active way.

We continue to suggest three tips for founders and other entrepreneurs when deciding whether active currency management makes sense:

  • Regularly review currency exposures and any natural business hedges.
  • Build a systematic plan for currency management.
  • Consider currency opportunities as well as currency risk management.

Major central banks continue to raise interest rates to bring inflation down to medium-term targets. Higher rates influence the cost of capital. Other factors, such as Russian energy flows and national debt dynamics, may imply higher funding costs for firms and greater uncertainty.

In Europe bank lending standards are tightening, business demand for loans is softening, and bank funding conditions are more challenging. While we do not expect lending flows to freeze, we do think entrepreneurs would be best served by re-examining their financing options.

Read the full report, Should business owners review their financing? (27 July 2022), which also answers the questions “What are major central banks doing?” and “How are monetary policy changes influencing entrepreneurs?”

Main contributors: Matthew Carter and Dean Turner

This content is a product of the UBS Chief Investment Office.