Advances in technology have expanded access to tailored working capital financing beyond enterprise corporates in a handful of jurisdictions – arguably for the first time.

Key takeaways:

• Insufficient bank technology, and the pressure on companies to provide mountains of data, have restricted many working capital products to all but a small number of large corporates.

• Major investments in the digitisation of the capital flow supply chain have opened up new financing opportunities to mid-cap corporates.

• An emerging breed of fintechs can now evaluate almost any company’s working capital requirements and structure a solution tailored to them.

All CFOs recognise the value of maximising available working capital. The issue is that up until now, sophisticated working capital products like supply chain finance, reverse factoring, portfolio receivables finance, and others have only really been available to enterprise corporates in a handful of jurisdictions.

But times change. And today, they present a new avenue for mid-caps to secure tailor-made financing, diversify funding sources, and stretch ahead of the competition. 

Why working capital financing? And why not before?

The advantages of payables and receivables financing are well understood: extending payment terms and supporting supply chains for the one, and providing access to cash quickly for the other. 

What with inflation, interest rates, and constant supply chain disruptions, these advantages could hardly be more timely.

But banks have always lacked the operational capacity to fund all but a small number of very large corporates, mostly due to very limited technology. Smaller, granular transactions have been largely ignored because the many moving parts are so difficult to process, especially for manual, outdated systems. 

Likewise, the demands on corporates to provide payables and receivables data on an ongoing basis has always been time consuming and costly. Not least for companies with small operations teams.

The result: most global banks have stopped servicing SMEs altogether. While regional and local banks, natural partners for any company outside of the FTSE100, have been unable to service those smaller transactions at scale. Until now.

Working capital goes digital

Technological innovation, spearheaded by a small number of fintechs and partner banks, has redrawn the landscape for working capital financing. The entire capital flow supply chain has been digitised and the money deployment process can now be embedded into the operations of any company. 

From arranging, setting up and running transactions, we’re seeing a dramatic reduction in operational costs and the upending of working capital financing as we know it. The barriers to entry for funders and corporates are coming down.

The question is, “why now?” Partly because the benefits of digitisation, from efficiency to cost savings, are too great. While the cost of doing nothing is too high. 

That goes for banking too, and in McKinsey’s latest Global Banking Annual Review, aptly titled “The Great Banking Transition”, it finds that “digital innovation [is at] an all-time high”. 

Just this year, banking and investment firms will spend around $652bn on digitalisation, according to Gartner. Debbie Buckland, Director Analyst at the research firm, says “Rather than cutting IT budgets, organisations are spending more on the types of technologies that generate significantly higher business outcomes.”

The pandemic has also dramatically accelerated digitisation in trade finance. The Asian Development Bank (ADB) reports that it “led to an acceleration in the rate of digitalisation and diffusion of digital solutions into business models and practices across a range of sectors.” A “nice to have” has very quickly become a “must-have.”

Working capital financing is just one area benefiting from a sudden surge in investment, albeit an important one. The upshot is that banks now have the technology to go beyond one-size-fits-all solutions, while corporates can reduce the vast operational pressures of participating in a programme.

A partner for growth

That said, there are some potential stumbling blocks. 

Far too many in-house builds have gone awry. McKinsey reports that only 30% of banks that have undergone a digital transformation have successfully implemented their digital strategy. “The majority fall short of their stated objectives.” But partnerships have enabled banks – even local and regional banks – to offer new working capital products to the names that need it most.  

By partnering with specialised fintech companies, banks have leveraged their expertise to implement cutting-edge technology and digitise their offerings. Likewise, corporates are embracing fintechs to leverage not just their expertise, but their relationships with the right funders.

By getting to know your supply chain, these partners can find your ideal working capital requirements, and structure a solution tailored to you. If you know where to look. 

At Finverity, our own corporate clients have improved their working capital position in a volatile environment, diversified their funding sources, made their working capital more efficient, and bettered their banking relationships.

Companies can extend payment terms to align payments with sales, release working capital, and mitigate cash flow pressures. They can increase financing capacity with tailored facilities to optimise working capital, help pay suppliers promptly, and unlock trapped cashflow. 

So for those willing to embrace working capital financing tailored for mid-cap corporates, the effect will be transformational.