How to leverage alternative financing to enhance cash management strategies

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Leverage alternative financing for global cash management

As the pace of global growth accelerates, large corporate treasurers and CFOs face opportunity and challenge, as do their SME suppliers. While SME access to funding has increased, funding is not always available at an affordable price, squeezing the supply chain.

The third annual C2FO Working Capital Outlook Survey analyses these trends and others to provide context around the potential for corporates to improve supply chain relationships and stability while improving margin, complying with new regulations and enhancing cash management strategies.

This year’s survey is expanded, adding China and India to previously surveyed executives in the United States, United Kingdom, France, Germany, and Italy, which paints a more robust picture of the state of working capital at year-end 2017. The expansion in survey participants also resulted in a larger average company size.

State of SMEs

SMEs find themselves in territory they haven’t experienced since before the Great Recession, starting in 2007 – funding growth as demands for their products and services rises. This comes against a backdrop of rising rates and changes in regulations and taxation. This confluence of circumstances puts SMEs in a tight spot, needing more liquidity than previously, but without affordable access to that liquidity.

SMEs seek additional liquidity

Two-thirds of the SMEs surveyed seek additional liquidity over 2016. Many are finding additional liquidity through fintech and alternative finance sources, as rising rates in the United States and Italy have compromised the financial supply chain. More than 50 percent of SMEs executives cite concerns about short-term financing. This problem could spread to the U.K. as inflation and rates increase there.

SMEs experience a gap in credit availability and cost. Interest rates spreads between rates for large corporates and SMEs still have not recovered from the financial crisis. According to the most recent data available from the Organization for Economic Cooperation and Development, SMEs pay an average of 1.4 percent more for credit than their large corporate counterparts.

Seven takeaways for large corporates

SME challenges impact their large corporate customers by increasing supply chain risk. CFOs and Treasurers face a different, but no less challenging environment than their SME suppliers. These situations are reflected in an “uncertainty paradox,” which dominated the survey. Positive signs of economic recovery, potential growth and improved SME access to funding contradict SMEs’ geopolitical uncertainty and lack of confidence in customer relationships.

Amid this uncertainty, there is much that CFOs and Treasurers can do to support the health of their supply chain while improving their own position, including:

  • FUNDING OPTIONALITY: Offer a mix of trade finance options to suppliers to increase the health of your supply chain without increasing risk
  • BROAD SUPPLY CHAIN SUPPORT: Consider how a programme that provides for early payment of approved invoices supports midsize and small suppliers who may lack access to supply chain finance programs. This support is welcome, especially for the smallest suppliers with limited or no ability to borrow affordably.
  • CASH MANAGEMENT: Engagement with a dynamic discounting programme that allows corporates to strategically leverage their supply chains for cash management and gross margin improvements. This benefit typically is not available through supply chain finance or procurement cards, which primarily benefit third-party financial providers.
  • REDUCE FINANCIAL SUPPLY CHAIN RISK: Improve access to cash to ensure that SMEs can grow and invest in their operations without increasing supply chain risk for their customers.
  • NO-RISK YIELD: Earn a no-risk yield on a short-term investment by deciding what supplier offers to take at any point in time to match current investment needs.
  • PUT TRAPPED CASH TO WORK: Put multinational corporate funds to work in regions where needed or turn repatriated funds into margin via dynamic discounting.

REGULATORY COMPLIANCE: Comply with regulations in the U.K. and EU that encourage large corporates to publicly report details on how promptly they pay their SME suppliers.

Reap the benefits

The C2FO survey notes that SMEs are increasingly demonstrating a preference to work with companies that are amenable to offering supplier-friendly accelerated payment terms. More than 50 percent of SMEs surveyed are very or extremely comfortable seeking early payment from a customer in exchange for a discount. More than 80 percent prioritize relationships with customers who offer supplier-friendly accelerated payment options over those who do not.

Technology and working capital management facilitate lower-cost, consistent supplier funding, promote better supplier relationships, and yield no-risk returns for corporates. The growing availability of fintech solutions such as C2FO and P2P automation provide stability for SMEs and reduce short-term risk for corporate treasurers and CFOs.

The rise of alternative financing options is a potential boon for both SMEs and corporates. Both parties can increase liquidity, lower their risk profile, bolster their balance sheets and strengthen business relationships with key stakeholders.