Solving the liquidity paradox

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Solving the liquidity paradox: Opening the floodgates of liquidity to grow business

The economy has been in gradual recovery mode since 2008, but cash remains stagnant on balance sheets rather than providing economic value. Meanwhile, the global supply chain continues to struggle for more efficient cash flow. Still, we see new hope to liberate working capital for all businesses.

The liquidity paradox is truly a global problem. Although economic conditions and regulations vary from one region to the next, the overall trends and the fundamental liquidity paradox conditions remain in place in every region and industry sector. What is the liquidity paradox? Simply put, it is an imbalance of liquidity; Excess cash on balance sheets of corporates contrasted with a lack of access to working capital for their supply chains, especially for small and midsize suppliers.

Conditions surrounding this paradoxical economic situation include:

  • Cash on the balance sheets of large corporations was at an all-time high, yet the cash stockpiles were stagnant due to low and even negative interest rates.
  • Increased regulations for financial institutions stemming from the 2008-2009 financial crisis successfully led to banks becoming more structurally sound as they de-risked their balance sheets.
  • The de-risking that banks did to comply with stricter regulations curtailed the borrowing power of the small to medium-sized enterprises (SMEs) that drive most economies.
  • The World Bank reported in September of 2015, “More than 50% of SMEs lack access to finance, which hinders their growth.” Corporates looked to payment terms extensions for their suppliers to improve their working capital, which further restricted cash flow and liquidity for SMEs. All these conditions remain in effect today, still hampering economic growth. As the United Nations’ World Economic Situation and Prospects 2016 report says, “More than seven years after the global financial crisis … the world economy has been held back by several major headwinds: persistent macroeconomic uncertainties and volatility; low commodity prices and declining trade flows; rising volatility in exchange rates and capital flows; stagnant investment and diminishing productivity growth; and a continued disconnect between finance and real sector activities.”
  • The recent Brexit referendum result in which UK citizens voted for withdrawal from the European Union has introduced additional turmoil and uncertainty in global markets.

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