“How the next financial crisis will happen” – turning the symptoms into the remedy

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By Mark Thomas, Director of Client Relations, EMEA at C2FO

Steve Schwarzman’s recent article in the WSJ, “How the Next Financial Crisis Will Happen,” highlights some issues close to our hearts at C2FO.

He points out that while the post-2008 banking regulations designed to strengthen the banking system are well intentioned, they are also likely to “have unintended consequences for liquidity in our financial system.” He paints a picture of a future crisis where “companies (are) not able to raise capital” from traditional sources and, as a result, “larger companies …retain unprecedented levels of cash” while smaller companies (SMBs) are unable to access liquidity at all, making them “particularly vulnerable.”

In fact, this is already happening.

Traditional bank financing to SMBs has contracted dramatically since 2008, with banks halving their lending activity to the SMB base in some countries. This is a huge drop off that, combined with endemic late payments, has starved an already ravaged slice of the business community of the liquidity it needs to fuel economic growth. At the same time, larger corporates have been stockpiling cash to reduce the liquidity risk weighting of their exposure to banks, resulting in record cash levels on their balance sheets, currently earning low or even negative rates of return.

But this liquidity paradox, that Steve highlights as a symptom of the situation, can also be part of the remedy.

Dynamic Discounting platforms like C2FO provide a mechanism for large corporations to use these cash reserves to provide liquidity to SMBs in the form of early payments on invoices. The benefits to both parties are clear. Corporates benefit from higher returns on their cash and reduced risk in their supply chains, and SMBs have access to the reasonably priced liquidity that is needed for them to survive and grow (C2FO is the cheapest form of liquidity available to >99% of suppliers using our platform).

Whilst Dynamic Discounting is emergent and will not solve the broader issues highlighted by Steve alone, it is certainly a fast-growing part of the solution.

Want to learn more? Download our white paper: C2FO – “The Liquidity Paradox”