Working capital optimisation is a key focus for companies trading in the current volatile and complex environment with strategies like unlocking cash trapped in payables, inventory and receivables, and redeploying it to pay down debt, reduce borrowing costs, or build an M&A tool kit, front and centre.
“Working capital optimisation is, more than ever, top of mind for our clients,” says Duncan Lodge, Global Head of Supply Chain Finance and head of trade finance for Global Payments Solutions (GPS), EMEA at Bank of America (BofA), in an interview with Treasury Today Group.
When it comes to supporting corporates with extending their payments terms, every company has different needs and a different relationship with its supplier base. Supply chain finance products can offer a range of solutions to support working capital across the supply chain from quick extension terms, to trade finance or card solutions, building out the dialogue to consider buying power, as well as the size and type of spend adds Jennifer Wan, head of Specialized Product Sales for GPS EMEA.
“Our focus is on developing a strategy that supports our clients’ goals, so we look at where our clients can optimise or diversify tools to extend terms and drive free cash flow, and alternative strategies for spend where payment terms optimisation is not possible,” she says.
Built in resilience
Positively, companies adapted their supply chains following the pandemic, building in supply chain resiliency by adding additional suppliers, plus-1 strategies, and reshoring and friendshoring in an approach designed to iron out concentration risk and vulnerability to geopolitics or supply shocks. Resiliency also comes from building redundancy into supply chains in a strategy that increases costs but gives support when one supplier is impacted by shipping constraints.
Elsewhere companies are also accessing funding in new ways to ensure capital structure optimisation. This could mean tapping longer term ECA finance and in the UK, the national wealth fund is playing an active role in the UK’s energy infrastructure upgrade.
But alongside traditional strategies and efficiency drives, corporates are also using a new suite of products to further bolster resiliency and working capital. “There are more tools in the toolbox than ever for companies thinking about payables finance,” says Lodge.
For example, BofA has rolled out a new Corporate Payment Undertaking, a type of supply chain finance that reduces complexity for suppliers by removing the need for a receivables purchase agreement. It allows corporate buyers to support their smaller suppliers who don’t typically sign receivables purchase agreements, he explains.
Similarly, Card-to-Account solutions can support working capital management whereby clients make payments with a card, but suppliers receive the full invoice value in cash in a process that also allows buyers to optimise their terms for payment. Buyers can also use those cards to address non-standard spend, so it’s a particularly useful tool for corporate buyers seeking to unlock working capital benefits when paying utility or tax bills. “With these three solutions (Supply Chain Finance, Corporate Payment Undertaking, Virtual Payables Direct) it is possible to address the entire payables for a company,” says Lodge. “A typical SCF programme targets the top 20% of suppliers, but with these types of products, it’s possible to now address this long tail of suppliers too.”
These products are also compelling because a corporate might not want to extend its supply chain finance programme because of the materiality impact whereby the finance is treated as debt, rather than accounts payable which would preclude the working capital benefits of the solution. “Clients are required to disclose SCF programmes, so materiality is always something they think about,” says Lodge
Digitisation
Although many stages of trade still rely on paper, Wan and Lodge say corporates are also leaning into trade digitisation. This means more are beginning to tap the benefits of applying AI to parts of the process and reducing processing times in tasks like checking and flagging anomalies in guarantees in a significant efficiency benefit.
“Digitisation in trade is a hard nut to crack, but we are seeing progress. This includes a reduction in manual processes and better visibility on data to inform more robust decisions,” says Lodge. In one example, BofA provides a solution whereby clients can outsource invoice approval to the bank. Corporates have access to a BofA platform that sets requirements to match, say, a purchasing order or cargo receipt, in a process that pulls golden source data via APIs from the client’s logistics provider and turns invoice approvals from weeks to seconds.
Digitisation in trade finance is also allowing teams to focus on high value tasks like structuring a large instrument with complicated risk clauses, rather than high-volume, time-consuming tasks. “Some risks can very quickly become a big issue for clients. High value tasks involve managing those risks and advising clients on the best approach,” concludes Lodge.
