These are unsettling times for global business leaders. And nothing makes them more nervous than the issue of access to working capital and liquidity for growth.
The coming of the Trump Administration, coupled with geopolitical upheavals elsewhere in the world, has brought an alarming degree of uncertainty to the economy. New tax policies, regulatory changes and rising interest rates promise to have a big impact on the ability of companies to raise money for current and future operations.
How finance professionals feel about the coming year or two can be gleaned from the second annual Working Capital Outlook Survey, conducted by financial technology vendor C2FO. Bottom line: the people on the inside don’t know a whole lot more than anyone else about what the future holds.
The political environment is “top of mind” for finance experts within some of the biggest multinationals, says Sean Van Gundy, managing director of working capital advisory with C2FO. The state of liquidity could change “drastically” in the months ahead, he says.
One potential change with huge ramifications would be the repatriation of between $1tr and $2tr of U.S. corporate assets, which are currently socked away in foreign locations with more amenable tax policies. A stockpile of that size would just about equal the quantitative easing program of the Federal Reserve Bank following the Great Recession of 2008, Van Gundy says. “It would be like an instant flush of cash.”
Whether the Administration is able to coax companies to bring that money back to the U.S. remains to be seen. Equally uncertain is the use to which they would put the funds. The last big repatriation, in 2004, resulted in a lot of stock buybacks, dividend payouts and acquisitions, rather than a wave of hiring and investment in new plants and production.
If, on the other hand, repatriation spurs real economic growth, look for interest rates to climb. And that development will have a serious effect on the ability of companies to raise cash.
Traditional supply-chain finance programs will come under increasing pressure, affecting manufacturers and suppliers alike, Van Gundy says. The latter will have a tougher time financing receivables, which are already at high levels due to buyers stretching out payment terms.
On the positive side, he says, higher interest rates will increase the flow of cash into the marketplace, and spur the development of non-traditional funding sources.
Since the recession, many old-line banks have pulled back from supply-chain and trade financing. Those that have stayed in the game have shied away from small and medium-sized borrowers. Banks such as Wells Fargo have focused on lending to people who didn’t need the money, Van Gundy says. “We have to get back into an environment of loaning to those companies that need access to liquidity to grow the business.”
Make no mistake about it: companies are itching to grow, especially small and medium-sized entities. According to the C2FO survey, however, their biggest concern is accessing the cash flow that will make that happen. Forty percent said their working-capital needs had increased over the previous year, while 29 percent said they have little or no ability to borrow. Again, blame the traditional banks that have turned their backs on anything other than multinationals with the deepest possible pockets.
That’s the niche that companies like C2FO hope to exploit. Van Gundy says there’s been a surge in non-bank sources of working capital, focusing on second-tier companies. They can make cash available earlier, shoring up the finances of strapped suppliers.
There’s nothing new about creative solutions such as discounts tied to the early payment of invoices. “Getting a cash discount is as old as having payment terms,” notes Van Gundy. But such schemes are becoming increasingly important options for suppliers. Non-bank entities such as C2FO “provide early-payment solutions on a scale that most AP [accounts payable] shops couldn’t handle if they had to do it on their own,” he says.
The future might be uncertain, but the need for increased liquidity isn’t. In recent years, companies have tended to hoard cash instead of putting it to work. Now, that shortsighted strategy is losing its luster. Executives that were obsessed with boosting short-term shareholder value find themselves having to invest heavily in both talent and technology. In the case of the latter, supply-chain managers need to embrace the world of automation, robotics and predictive analytics — all of which carry a substantial price tag.
Companies that were already heavily leveraged, having been lured into heavy borrowing by persistently low interest rates, will find their financial state increasingly untenable. Even a small jump in interest rates can have a major effect on the cost of money for small and medium-sized businesses, Van Gundy says.
He sees a continued defection from supply-chain financing by banks, with innovative players taking their place. “I think that non-traditional financing is going to become mainstream,” he predicts. “The next 18 months to two years are going to be really interesting.”
One thing about uncertainty that’s constant: It’s never boring.