“Mind the gap” – a common phase I heard recently on the London Underground reminded me of one of the most fundamental issues faced by businesses currently, the working capital financing gap. This article presents different ways companies can cover this gap, quickly and effectively.
Going back to basics, we define Working Capital as the funds invested in current assets such as raw materials, work-in-progress, finished goods, receivables, cash etc. From a manufacturing perspective, working capital is essential to keeping the flow of production smooth and continuous. For supply chain managers working capital provides stocks and goods in transit to allow optimization of transport costs.
Therefore, having the optimum Working Capital is essential as it can be seen as the driving force for an enterprise.
All types of businesses, small or large, corporate or family-owned, often fall short of working capital. When this happens, financial management becomes a crucial exercise for the CFO and Treasurer especially in situations when new orders are received, when the firm needs to expand, when raw material costs rise significantly, or when inventory levels need to rise to take advantage of logistics benefits. Under these circumstances, businesses may not have enough liquidity to meet their short-term obligations. Without sufficient working capital, businesses face many drawbacks including issues from concerned potential buyers to worried corporates and lenders, on all of whom the organization is dependent to remain successful.
Lack of working capital is a concerning red flag for a firm’s lenders and investors. A firm`s working capital position affects its ability to pay back loans. When an investor or lender realizes the risks, they might reconsider to offer support and without investors’ help, a small or medium business can be denied loans that would be crucial to expand, even when having wide profit margins.
Thus, having sufficient working capital is important and it ensures that the operations of the business are not interrupted, profits and the return on capital investment is maximized. There are several strategies for managing working capital cash gaps when they arise.
Typically, these are:
Cash credit is one of the most widely used working capital loan types. This facility is credit-dependent and is provided against a pledge on stock-in-trade, such as raw materials, finished goods, work-in-progress, or against receivables from debtors or even against property, shares, etc.
The overdraft facility is available to current account holders for withdrawing money, more than what’s available in their current account. This facility is usually offered to high-value current account holders and again it is credit dependent.
A bank guarantee is an undertaking from a bank that if a purchaser fails to make repayments or honor other commitments to its vendor, the bank will pay the amount due under certain circumstances, again this type of facility is credit dependent.
Letter of Credit
Letter of credit (L/C) is a non-fund based working capital arrangement used to indemnify the sellers from credit risk. It is mostly used in international trade where a supplier might not be known to the importer and the difference in jurisdictions further increases the credit risk. So, a bank steps in and will issue a Letter of Credit to pay amounts due when goods are typically delivered against a set of documents agreed in advance.
New alternative lending solutions are emerging tailored to the needs of underserved markets
All of the structures mentioned above are secured and based on the credit rating of the applicant and not available to many clients. As new regulations are imposed on banks, credit and hence loans have become harder for banks to fund. In addition, banks are lending less and less of their portfolio to small and medium-sized enterprises focusing on large well-rated corporates instead. Therefore, many companies are deciding to use their own assets as collateral in what is referred to as Working Capital Financing Solutions.
As a first step, borrowers use Receivable/Invoice Discounting when in need of working capital. This is usually a fund-based working capital arrangement under which the bank purchases an invoice drawn by a seller/supplier and pays it immediately after deducting some amount from the bill as a discount or commission.
Arviem’s Working Capital Financing Solutions: Financing goods in transit ‘from container doors closing until doors opening’
At Arviem we leverage our cargo monitoring process to prove the robustness of your supply chain, providing data to banks allowing them to understand the exact supply chain and finance your goods in transit and in warehouses. We have developed Arviem Working Capital Financing Solutions to help to bridge the funding gap by using our independent cargo monitoring and partnerships with agreed banks who acquire your assets whilst in the supply chain.
While it might look similar to Discounting, Arviem’s working capital financing solutions are more than Discounting; we use a process where the client’s assets are used as collateral, through the use of clean title transfer to release cash. Typically, this decision is reached by the client when it needs to have more working capital for expansion purposes, filling the gap in funding. The company, therefore, opts to sell its inventory (the Asset), typically in a warehouse or in transit and receive cash instead.
Unlike in the case of traditional financing structures, both small and large-sized companies can qualify for Arviem’s working capital financing solutions. Arviem enables wholesalers, retailers, distributors, traders, and even service providers to get access to financing. With the newly developed working capital financing services, Arviem addresses the needs of even those companies who might have difficulties obtaining traditional working capital financing through banks and financial institutions. This is possible as the basis for Arviem’s working capital financing structures is the Asset, unlike in the case of traditional financing structures when the lenders evaluate a company for eligibility based on stable balances sheets.
Arviem’s Working Capital Financing services have many benefits:
- Can be obtained quickly– Unlike conventional loans that require a lot of documentation, Arviem’s working capital services are easy to obtain without hassles, as long as the Asset and its location are acceptable.
- Financial stability– Arviem’s Working Capital Services can cushion a company going through hard economic times and quickly restore it to a stable financial state. It is due to the fact that they are given within a short period of time to increase the company’s cash flow.
- Easier to get compared to loans– Realistically, it is easier to obtain Arviem’s working capital financing services compared to other lines of credit. It is attributed to the fact that very few processes are involved, and the amount depends on the asset and location.
- More flexible in terms of restrictions– Arviem’s working capital services are very flexible when it comes to how the company operates. It does not come with strings attached, like other loan forms.
- Lack of debt– Arviem’s working capital financing services are one of the best ways for a company that wants to stay free of debts and to keep the company’s borrowing options open.
Interested in our alternative working capital financing structures? Let us answer you a few questions regarding Arviem’s working capital services
What determines what value of financing a Company is eligible for?
Generally, a company receives between 75%-80% of the value of the assets involved, but this is asset dependent.
What are the costs associated with Arviem’s working capital services?
The cost of working capital financing depends on the value of the assets (collateral) used, the amount involved as well as the general risk involved.
How does the due diligence process for Arviem’s working capital services work?
Before financing is agreed with any given company, Arviem has to conduct research about the asset involved and location of the asset. Typically, assets need to be in independent warehouses.