6 Reasons Why Alternative Financing is a Hot Topic for CFOs
As financial stressors make cash difficult to secure, alternative financing methods such as sale-leasebacks become more attractive
In today’s fast-changing environment, CFOs are increasingly focused on transformation and strategically positioning their organization for future success. However, serious financial stressors are making that job difficult, as cash is more difficult to secure. To ensure their business is set up to succeed, CFOs are investigating alternative sources of capital.
One such alternative is a sale-leaseback, where a business sells its real estate to an investor for cash and simultaneously enters into a long-term lease. Many predict alternative financing methods, such as sale-leasebacks, will grow in popularity over the next year. Here are six reasons why:
Climbing Interest Rates
The Federal Reserve hiked interest rates throughout 2022 to tame inflation. This trend is likely to continue in 2023, with the Fed raising interest rates for the 10th time in a row in May in its ongoing efforts to curb inflation.
High interest rates make traditional loans expensive and hard for some companies to secure, particularly those that are sub-investment grade. It also makes refinancing more challenging, putting CFOs with debt coming due in a difficult position. The logical option is to find alternative avenues to secure capital to pay near-term debt and create growth opportunities for the future.
Inflation Remains High
Although inflation has begun to cool, the annual rate as of April 2023 is 4.9%, much higher than the Fed’s target of 2%. As a result, the price of commodities, raw materials and labor remains high, forcing most businesses to eat into their savings to stay afloat. For CFOs looking to develop capital-raising strategies that will provide cash without putting an intense strain on their business, alternative financing methods such as a sale-leaseback are a great option.
Looming Possibility of Recession
The World Bank has been slashing earlier economic growth figures it had projected, indicating that we may be headed into a recession in the coming months. Global economic growth had been initially projected at 3% but was later reduced to 2%.
This reflects the third weakest pace of growth in nearly thirty years, exceeded only by the global recessions caused by the pandemic and the global financial crisis.
A recession is extremely difficult on businesses, and often results in significant declines in sales and profits, layoffs, slashed capital spending and restricted financing access. If that's where the economy is headed, the best way for CFOs to prepare is to start looking for alternative financing to increase cash flows and bolster their balance sheets to weather the storm.
The Talent War Continues
The great resignation took the war for talent to a higher level as labor shortage became rampant, and the skills gap widened even further. Companies are being forced to reskill or upskill to meet current demands.
Training magazine shows this data that reveals why reskilling is essential:
- 57% of US workers want to update their skills, and 48% would consider switching jobs.
- 71% of workers say job training and development increase their job satisfaction.
- 61% say upskilling opportunities are an essential reason to stay at their job.
- 94% of workers would stay at their company if their company invested in their careers.
Reskilling takes financing. With the average cost to reskill an employee standing at $24,800, coming up with an actionable capital-raising strategy is critical.
Increased Customer Expectations
The great resignation took the war for talent to a higher level as labor shortage became rampant, and the skills gap widened even further. Companies are being forced to reskill or upskill to meet current demands.
- Fast solutions to customer complaints
- Access to preferred service channels
- Opportunities to answer questions themselves through help centers
- Hyper-personalized experiences
- Data protection and privacy
Growing or staying in business is impossible if you can't meet these needs. Recent reports show companies have already begun investing in stellar customer experiences, with those investing in omnichannel experiences jumping from 20% to more than 80%.
Also, 84% of companies are focusing on improving mobile customer experience. Because improving customer experience means investing in tech, spending will increase, requiring CFOs to come up with intelligent ways to shore up extra capital.
Accelerated Digital Transformation
Beyond the rampant use of AI, other disruptive technologies such as blockchain, the cloud and IoT are becoming more common and interdependent in improving business functions.
These technologies are not static either but are continually evolving, creating the need for businesses to rethink their structure and ensuring employees across all levels can keep up with the technology.
Despite the potential recession and tough economic times, developing solid digital strategies and reviewing existing tools and processes for efficiency gaps will help create a unified approach to digital transformation. As with other processes, transformation requires cash, so CFOs will likely turn toward alternative financing strategies to unlock the capital needed.
Final Word
2023 is full of headwinds for CFOs, which will require businesses to explore unique capital strategies to ensure they have the cash needed to succeed. At W. P. Carey, we specialize in sale-leasebacks and work with CFOs to help them monetize their real estate and redeploy that capital back into their businesses. Particularly in today’s economic environment, CFOs will likely find that the rate at which they can monetize their real estate through a sale-leasebacks is more attractive than the current long-term borrowing rate.
With significant dry powder, 50 years of experience and the ability to provide certainty of close, W. P. Carey is poised to deliver much-needed capital for companies interested in exploring sale-leasebacks. Contact us today to find out if your company and real estate are a good fit!
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