Corporate Treasury: Funding Working Capital

One of the main takeaways is that, for some companies, managing working capital is a key strategic goal (in our survey of September 2024, 44.6 % said their company has a formal working capital policy): this is reflected in the measurements and tools, which vary to reflect regional differences. Some use working capital financing if it is a cheaper source of funding: they often find it is not – though some find it is. Many participants are interested, but prioritise operational issues, such as improving supplier payment terms or late collections.

Our survey showed a higher level of adoption of receivables financing (factoring, securitisation) at 48%, versus 36% for supplier financing. For future intentions, both solutions were 39% and 41% respectively. The call gave a lot more colour.

Factoring:

• One participant had implemented a factoring programme. They initially had a poor experience with a fintech, and so moved to a bank solution, the bank offered the same price without a credit wrap. The company views participation in the programme as a way of managing wallet share, and so carefully controls distribution. This works, but it limits the programme size.
• Few others on the call were actively factoring or selling their receivables. Some had discontinued existing receivables programmes, due to cost. This generated a lively discussion: some found the cost attractive, especially if you include other considerations, such as risk mitigation.
• Factors need a lot of historical data to get comfortable with the credit risk of the receivables they are buying. Especially for spin offs, this can be a challenge. It can also lead to some cherry picking – only selling the better credits.
• One participant found that factors had to be reassured about the credit of the company selling the receivables – there is a period when they have collected the cash but not yet reimbursed the factor. This can be addressed.
• Participants who mentioned payment discipline stated they did not want factoring to disguise poor collections performance. The alternate view is it can simplify internal debates by making the business bear the cost.
• One participant decided not to implement factoring as it would be viewed as financial engineering.
• Another participant found it was easier to factor receivables due from some African countries than to source direct borrowing there.

Supplier Financing:

• Participants were more active in this field. A common issue for all participants was getting Procurement on board. Some participants, but not all, had succeeded. The success was attributed to getting the buy-in of senior management, and convincing Procurement that access to cheaper funding was vital for securing the supply chain.
• Participants felt Procurement didn’t understand the funding issues. Other factors include control of the relationship with the supplier; not having the financial contacts in the supplier’s organisation; and KPIs. Longer payment terms usually lead to an increase in invoiced product cost. Even if this is a better solution overall, it hurts Procurement’s KPIs – it can be difficult to change them.
• However, during COVID, programmes grew as more suppliers asked for help.
• In the end, this discussion came down to viewing the supplier as a business partner. No participant was trying to achieve short term gains at their suppliers’ expense.
• Syndication was an issue here, too: the biggest programme on the call used two fintechs, with a plug and play approach for relationship banks who decide to join or leave. This is partly a function of programme size, but is also because relationship banks’ credit appetite can change.
• All participants found onboarding and administration worked well.
• One participant found payment terms varied widely, and were not always applied correctly. Improving and applying payment terms became the priority.
• One cross border supplier financing programme involved the IFC (International Finance Corporation, a department of the World Bank). With the Exim banks, they can be helpful, especially in some of the more challenging countries. But they can be difficult to deal with.

Other considerations:

• Early payment discounts: treasurers dislike them on the receivables side, as they are an expensive source of funding. They are happy to take advantage on the payables side, even if they hurt cash flow.
• One participant had looked at inventory financing, but not found any viable programmes. This appeared to be the general case.
• There was no mention of the other supply chain financing tools, such as discounting portals.
• Funding partners were limited to banks. Non banks were too expensive.

Bottom line: this call did not reflect the increase in the use of supply chain financing we see discussed in the media. It did show treasurers are increasingly familiar with the products, but attitudes vary widely, from being a strategic concern to something to be managed.

In Treasury, one size rarely fits all. It certainly does not fit all here.