Accessing Hidden Liquidity

This article provides an understanding of how to better leverage the liquidity that is available to organisations and gives you specific strategies that can be implemented to help corporate clients loosen tight liquidity in their financial supply chain.

There has never been a more critical time to access hidden liquidity. For both banks and their corporate clients, accessing and controlling working capital can make a huge difference in how you operate and maintain growth.

With automated tools now available, banks can help their customers tap into an estimated half a trillion dollars lying dormant at any given time within the many connective financial systems of global trade. These tools, aimed at greasing the wheels of the financial supply chain, highlight capital in transit during the course of trade and help get it to its destination more quickly, where it can be put to work creating more products or earning interest. The beauty of the process is that it leverages existing liquidity and can be put to use with little additional risk.

Corporates reeling from the credit crisis are well aware of the importance of uncovering such hidden liquidity. With their lenders in turmoil, companies know they cannot take anything for granted. Financing that may have been available to them just 30 days ago may no longer be an option.

Given the environment, cash now reigns supreme. With their very survival dependent on ready access to cash, some companies are even placing greater importance on their ability to improve liquidity than to generate revenue. For the typical corporation of any size, the prospect of finding easily accessible money is a concept that resonates more strongly now than ever before.

With credit tightening around the globe, banks are seeking ways to help their valuable corporate clients get capital to grow their businesses. They need not look far.

Avoiding the Cascading Effects of Lost Liquidity

At the same time that their financing is in jeopardy, companies are worried about the financial health of their suppliers. Within the huge connected web of global commerce, one supplier’s misfortunes can have a cascading negative effect on others, impeding the chain of events necessary to keep cash flowing. Financial supply chain management tools support the steady movement of funds between buyers and suppliers, helping keep all parties to commercial transactions healthy.

Banks also benefit. At a time when lending to individual corporations carries outsized risk, the ability to use financial supply chain management tools to help companies unearth transaction-based capital is especially appealing. The process enables banks to spread their risk over a large number of companies and trades, minimising their exposure to any single one. It also lets banks extract fees for new kinds of services.

Electronic Invoicing: the End-to-End View of Transactions

Exactly how do these automated tools of financial supply chain management work? There are specific problems that the tools address. The first is liquidity that is known to exist but cannot be accessed. Unpaid invoices are the most obvious example. Sellers know that the amounts that they have invoiced are on the way, but they are unable to put that money to use until it is actually paid. The other problem relates to inefficiencies in the financial supply chain. In these situations, deals cannot be struck and/or trades cannot be made in a timely manner because liquidity is not available by a certain date.

The first step to solving both these problems is to take advantage of Internet technology to create electronic invoices of all the transactions occurring between buyers and sellers. Having an electronic end-to-end view of all of a customer’s business transactions puts a bank in a position to offer a wide range of innovative financing arrangements, at far less risk than extending credit through loans.

Finding Hidden Liquidity: More Flexible Short-term Credit

Based on its view of upcoming transactions and anticipated cash flow, a bank can choose to extend financing to a buyer’s suppliers. At a time when credit to fund day-to-day operations is scarce, the goal is to ensure both buyers and suppliers enjoy continued smooth operations. A retailer, for example, wants to guarantee its shelves are filled, by ensuring its suppliers have the cash they need to create and deliver their goods.

Under such a programme, a large number of small suppliers to the retailer upload their invoices to a central site, providing the bank with a view to all the money its retailer-client owes. Upon examining all the invoices uploaded to the site, the retailer determines whether to accept, reject or partially accept them, which forms the basis for extending short-term credit by the bank.

Using this financial supply chain technology creates many interesting possibilities. The suppliers can decide when they need the liquidity and how much they need. They can request financing at an appropriate time and for the amount that they want. For the bank - such a self-service scenario means lower operational cost and ability to service large numbers of low-value transactions. For the retailer, they do not have to worry about whether an invoice is financed or not and still can pay the bank - which provides the settlement and reconciliation services to the retailer and their suppliers.

The retailer’s business is more secure because its suppliers will be able to keep goods coming into the stores. The suppliers are happy to have their working capital freed up. And the bank gets a chance to earn a small amount of interest on the credit it is extending, as well as a small fee from the retailer.

Factoring - an Old Idea with a New Twist

Automated financial supply chain management tools also lay the groundwork for related transactions aimed at freeing up hidden liquidity. Factoring, which enables a business to sell its accounts receivable at a discount, and reverse factoring, in which a bank advances payments to a buyer’s suppliers as a means of accelerating cash flow, are both examples.

The greater insight into cash flows and receivables afforded by automated financial supply chain management tools are essential to helping banks make better decisions about the many transaction-based financing options available. Without that birds-eye view, banks would be hard-pressed to provide the type of financing solution that best meets a client’s needs, while still maintaining appropriate risk levels.

Global Liquidity Management: Needed in Today’s World

Liquidity is not just hiding deep within the various transactions to a trade. Liquidity also becomes murky depending on how it is being managed, particularly within entities that operate across the globe. Especially during this current period of financial turmoil - in which each area of the globe is facing its own set of economic challenges - corporate customers are desperate for greater insight into what is happening with their accounts payable and receivable in all the geographies in which they operate. Information that is updated daily or even hourly presents a tremendous opportunity for banks that are prepared to provide it through financial supply chain management automation.

Eliminating Inefficiencies: Letter of Credit Replacement

Streamlining the financial supply chain also starts with greater visibility into the cash flows and receivables behind trading transactions. The advent of more efficient logistics and the Internet already has promulgated a shift away from the laborious letter of credit process to open-account trading, in which buyers access the financial information they need about suppliers via the Web. Now, technology is bringing the rest of the financial supply chain up to par with the efficiencies of open-account trading.

At the core is an Internet-based system or portal that lets buyers and sellers interact flexibly, even instantaneously, across time zones or borders. The portal provides the financial institution with a window onto invoices, cash flows and receivables, allowing it to support a wide range of financing activities to ensure the unrestricted flow of goods.

With automated financial supply chain management tools, no trade should ever be delayed or foiled for want of cash or timely information. For example, using their window onto supplier purchase orders, banks have the ability to make informed decisions about whether to lend money to suppliers before shipments are made, thus ensuring the flow of goods. In such a transaction, known as pre-shipment financing, the bank then collects the money it is owed from the buyer at a later stage. In a similar transaction known as post-shipment financing, a supplier sends the goods and, upon inspection, a buyer instructs the bank to send payment. Intra-shipment payments support the financing of transactions when the goods are still in transit. Technology is permitting such financing arrangements to be assembled and agreed upon much more quickly than in the past.

Financial Supply Chain Technology Finds Hidden Liquidity

With the global economy in unprecedented turmoil, the ability to quickly deploy technology to unearth hidden liquidity and improve the efficiency of trading transactions could not come at a more opportune time. Your customers are all ears. Now is the time to educate them in the many ways they can turn simple transactions into steady streams of cash.

As e-commerce continues to shape the world, financial institutions and corporations will need to deploy integrated electronic transactions platforms that link their internal systems to one another. The result will be greater efficiency in the total financial relationship between them, including document management, transactions and settlement.

Article by  Mr. Sanjay Dalmia, CEO of fundtech ltd. He has a mandate to navigate the company's advancement into new territory. Prior to Fundtech's acquisition of CashTech, Dalmia was head of product at CashTech. He has been instrumental in creating and enhancing the company's intellectual property, driving the development of Fundtech's Global CASHplus offering along with new modules in financial supply chain. Prior to CashTech, Dalmia worked with HSBC and ABN AMRO Bank for over a decade.