Are High Interest Rates Going To Crush My Closeout Business?
Recently the Federal Reserve raised interest rates and indicated they would likely continue until inflation is under control; this led economists and others to warn about worst-case scenarios, including a recession. Amidst all this chaos and noise, it can be very difficult to understand how those actions, and subsequent reactions, might affect businesses. If you have too much inventory and borrow against it to run your business, you will have a challenging time as rates go up. In many cases companies in this situation will get rid of discontinued inventory, closeouts and other dead stock sitting in the warehouse costing money.
Going back to The Great Recession of 2008, to stimulate the economy the Fed lowered rates close to zero and it stayed that way for a long period of time. In 2016, the economy started to heat up and the Fed began raising rates again to keep inflation in the target range of 2-2.5%. Whether the Fed waited too long to raise rates is up for debate, and the answer probably won’t be clear for many years.
Companies that specialize in liquidations and closeouts are often called inventory liquidators or buyers for discontinued inventory. In any case, closeout companies can help a business struggling with too much inventory in the warehouse. They will often buy closeouts for cash and take the entire inventory being liquidated.
The emergence of COVID-19 in late 2019 sparked severe economic impacts on the global economy; in response the Fed lowered rates back down to almost zero in an effort to drive demand. At the same time, various federal loan programs like the Paycheck Protection Program were introduced to provide further support. This had a beneficial effect on businesses by supplying them with reserve liquidity, helping with demand, and leading to increased levels of employment. Overstock inventory began selling like crazy and inventory liquidators flourished because it was so easy to liquidate excess inventory and get rid of closeouts. Companies were shutting down 3PL warehouses filled with too much inventory and this lead to the current flood of inventory on the market now. However, supply chain issues emerged, and, in many cases, companies could not get raw materials to make products like cars and homes. This is classic supply and demand; the supply chain pinched availability of raw materials and finished goods, so we started having to pay more for them. In a perfect world, companies would figure out how to make more products or source more raw materials from another place. However, that hasn’t been easy to solve. As an example, the cost of building materials skyrocketed, impacting housing, with tenants paying higher rents and demanding increased wages to cover these costs.
As late as fall of 2021, the Fed was still labeling inflation “transitory” because they felt higher prices were temporarily caused by a COVID-19 hangover, and that supply chain issues would resolve. They felt the market would adjust and prices would revert to normal. Over time, the Fed’s language started to change. They spoke about certain categories where inflation was more sustained but still believed the overall picture was manageable. Online liquidation sales grew along with closeout websites, wholesale closeouts and Amazon FBA sellers needing to liquidate FBA warehouses. This further fed into the problems.
As it became evident that these issues would take longer to resolve, the Fed began signaling that higher prices were problematic, more sustained, and spoke more emphatically about moving interest rates higher, more quickly, to dampen inflation. The Consumer Price Index, that famous “basket of goods,” started showing more key components experiencing significant price increases. It all felt incremental — until it wasn’t. Now we are in an environment where cash may become King once again and liquidating inventory for cash will mean something. If you have excess inventory dead stock sitting in a warehouse, you probably should consider shutting down 3PL warehouses, or move warehouses into a smaller location and get rid of everything that isn’t selling. Warehouse liquidation sales can be an effective way to get rid of too much inventory sitting in the warehouse and convert it into cash. By getting rid of overstock, closeouts and discontinued inventory you can also create extra space in your warehouse. In you are shutting down a 3PL warehouse or moving to a smaller location, you may want to search terms like where to sell overstock, where to get rid of inventory, donate inventory, liquidation buyers and overstock inventory buyers. Any of these terms will help you find a buyer for your extra inventory.
In the short-term, rising interest rates increase borrowing costs. This could impact purchasing and investment decisions for both businesses and consumers, cooling demand. It is important to consider how this may affect your business, including your tactics and strategies for the next few years. Rising interest rates means higher borrowing costs, which means margins on sales are lower leading to less profit margin. Consider getting rid of old inventory that isn’t selling and closing out dead stock, overstock inventory and liquidation items.
As another example, if your company has plans to invest in automation because you cannot find enough workers, it may take more time to acquire the necessary equipment/robotics, the cost of the project may change, and the return on the investment may be impacted. With these considerations, how might you adjust your approach? Will it affect your firm’s sales or margins?
On a more personal level, either for business leaders or employees, how do changes and volatility in financial markets influence investment decisions or retirement plans? Companies with too much inventory on the books are at risk of challenging times when money gets tighter and sales demand decreases. This is one reason closeout businesses always keep a pile of cash on hand to make last minute purchases of liquidation products and surplus merchandise. If a business is shutting down a 3PL warehouse and liquidating the entire inventory, closeout buyers are ready to quickly buyout inventory and pay immediately.
current practices to optimize your treasury or accounting function. Treasury Management professionals regularly talk to business leaders about their cash conversion cycle — how quickly money is collected versus the pace at which you send money out the door. That can have a material impact on your borrowing needs, your line of credit, and interest expense on your income statement. Bankers have tools and techniques to accelerate cash collection and slow down outflows to vendors, and to improve efficiency in your back office. Buying liquidation inventory reduces costs and this is less money out the door and sales at higher margins. Liquidation buyers sell overstock inventory to discount stores and closeout brokers or closeout websites. Excess inventory buyers are always in the market for closeout toys, closeout home décor, overstock housewares and excess stock of lawn and garden and pet product liquidations.
In the low-rate, low-return environment of the past several years, there have not been many options for deploying your cash. However, in a rising-rate environment, businesses with liquidity may want to consider different possibilities for operating, reserve, and strategic cash, while not losing sight of risk tolerance. Do you have an investment policy? If yes, it may be time to revisit it; if not, this is likely a good time to establish one considering current economic conditions. Alternatively, is now the time to reduce leverage for your business better by retiring debt with excess liquidity and getting rid of overstock inventory taking up room in the warehouse.
Merchandise USA buys excess merchandise, wholesale surplus inventory, liquidation items and business liquidations. We specialize in wholesale stock and selling discontinued inventory.
