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Decipher the Corporate Liquidity Impact of the Student Loan Unfreeze

By Kyriba Value Engineering
Dory Malouf, Director

The pendulum of the economic clock may be poised to swing again. With the unfreezing of the student loans in sight in addition to a high interest rate environment, corporate America braces for an unexpected aftershock. Economists have been sounding the alarms, but are businesses truly prepared for the financial turbulence that might emerge from millions, 43.5M to be exact, of Americans shouldering their student loan burdens again?

In this blog, we take a deep look at the corporate impact of student loan unfreeze, especially related to liquidity and cash conversion cycles.

The Calm Before the Storm of Corporate Liquidity Challenges

In a bid to provide financial relief during the COVID-19 pandemic, student loans were frozen. This temporary reprieve had wide-ranging effects, notably increasing the disposable income of millions. In fact, the average eligible borrower added an additional $138 per month to their cash flow, according to the National Bureau of Economic Research. The ripple effects extended to businesses, as consumers were more financially flexible, leading to increased spending in numerous sectors.

Although the pandemic-driven relief program acted as an economic stimulus, there is a darker side to the financial relief. The resumption of student loan payments combined with high interest rates may fuel a consumer-led recession. Unlike the zero percent interest rate environment during COVID-19, today it is more expensive for corporations, consumers, as well as the government to access capital. The combination of strained consumer budgets and corporations cutting overhead will have a negative impact on the overall economy.

The Impending Financial Aftershock

What happens when this bubble of financial relief bursts? As the freeze is set to lift, the tremors are already being felt. According to Credit Karma, a whopping 56% of borrowers are filled with trepidation, anticipating struggles with basic living expenses like groceries and rent.

For businesses, this could translate to a high probability of sharp revenue declines, especially for companies operating in non-essential sectors. The scenario that unfolds is simple but grim. As households tighten their budgetary belts, purchases of luxury items and non-essential goods and services will take a backseat.

Corporate treasurers and financial strategists now face the imminent threat of a domino effect reminiscent of the 2008 financial crisis. Talk of a looming recession is in the air, coupled with the potential fluctuations in interest rates and more restrictive lending practices. The gauntlet has been thrown, and the pressing questions are: How will companies maintain liquidity amidst dwindling consumer spending? And, are there cash flow management strategies that organizations should implement to prepare for the unavoidable?

How CFOs Can Brace for the Impact

The Federal Reserve estimates that 44 million people in the U.S. are affected by the current student loan debt crisis, with debt amassing around $1.8 trillion. Economist David Rosenberg is among those predicting a potential consumer-led recession, especially considering that those affected by the debt are expected to commence an average monthly payment of $503 beginning October 1, 2023.

To navigate these rough waters, CFOs should consider implementing cash flow management strategies to help ensure cash flow certainty, sustainable liquidity and financial resilience. Below is a list of tips from our experts.

Table: Cash Flow Management Strategies CFOs Should Consider to Prepare for the Student Loan Unfreeze

Certainty of Cash Inflow Streamline payment collections. Consider tools like factoring to get paid quicker and reduce credit collection.
Operations Treat inventory management as both a logistics and liquidity challenge. Balance fixed costs and asset management to retain financial flexibility.
Hold Cash Longer Ensuring supply base / vendor viability, deploying a supply chain financing program can offer the ability to hold on to cash longer and pay your business partners faster.
Capital Management Evaluate debt maturities due over the next couple of years for the opportunity to refinance / extend maturity beyond five years.

The Strategy Behind Capital Management

Potential for lower sales underscores the interconnectedness of corporate capital strategies. To ensure maximum shareholder returns, managing debt and controlling the cost of capital are paramount. The Return on Capital Employed (ROCE) is a vital metric that defines the profitability and value-generation capability of a company. The denominator here – assets – becomes crucial when one considers potential economic headwinds.

One effective way to boost ROCE is through factoring receivables and utilizing supply chain financing on payables. These programs enable lower cost of capital which ultimately generates a higher return to shareholders. For example, a 2022 study by the Aberdeen Group found that the average interest rate for supply chain financing was 3.5%, while the average interest rate for a standard bank loan was 5.5%. This means that a corporation could save 2% on its interest costs by using supply chain financing instead of a standard bank loan. This 2% difference multiples in savings for a corporation when considering hundreds of millions of dollars at play.

In these uncertain times, the significance of effective cash flow management strategies cannot be overemphasized. As businesses face potential revenue declines, especially from customers grappling with student loan repayments, optimizing cash flow becomes paramount. The overarching goal should be to manage and control debt and ensure the weighted average cost of capital remains as low as possible, preserving and enhancing shareholder value.

The Regional Banking Conundrum

An indirect yet significant impact of the current economic scenario is seen in the banking sector. Regional banks, often closely intertwined with local businesses and households, have been signaling tightening lending practices, primarily driven by the need to mitigate risks associated with potential loan defaults and ensure their own financial stability. Such moves can exert additional pressure on corporate liquidity.

For businesses, navigating this tightened lending environment from regional banks demands diversifying their financial sources, building and nurturing strong relationships with multiple banks, and leveraging financial tools and strategies that demonstrate their credit-worthiness and operational resilience.

Harnessing Technology for Long-Term Liquidity Management

For CFOs, beyond traditional finance responsibilities, there’s a growing need to become tech-savvy strategic partners. Whether it’s managing cash conversion cycles or ensuring real-time visibility into finances, technology-based solutions offer a competitive edge.

Gartner’s insights spotlight the potential of factoring programs and supply chain financing. A cohesive technology platform providing visibility into the entire liquidity ecosystem can be the linchpin for effective cash flow management. The dividends of such an investment are manifold – real-time decision-making, enhanced accuracy and fostering a talent pool equipped to handle modern financial challenges.

It’s not just about tools and platforms. A CFO’s role in talent development is pivotal. By creating an environment conducive to learning, especially in harnessing the latest technology, businesses can ensure a robust, agile finance team that’s well-prepared to adapt to ever-shifting economic tides.

The Bottom Line

The imminent unfreezing of student loans coupled with high interest rates brings with it not just the resumption of individual financial burdens but waves that may ripple through the entire economy. As millions brace for this shift, corporations must exhibit foresight and agility. While challenges loom, they’re also a call to action: to innovate, strengthen partnerships and lean into the transformative power of technology. In navigating this uncertain terrain, the astute will not just endure, but find ways to thrive.

Interested in learning more about how CFOs can prepare for the student loan unfreeze? Watch the on-demand webinar.