A Simple Matter of Funding?

The subject of bank lending to businesses, particularly small and medium-sized enterprises (SMEs), is a frequent issue in the news. On one hand, you hear that businesses are holding back and not requesting additional funds due to uncertainty. On the other, you hear that banks are unwilling to lend, or if they do it is under far more stringent terms than previously. The truth is somewhere between the two extremes, but certainly the availability of funding is tight given current economic conditions. 

When considering funding, the first question is to think about whether it is necessary to go to a third party for additional funds. This requires an analysis of the corporate’s available liquidity to determine what balances are currently available and where those funds are located. To this analysis must be added the calls on liquidity and cash flow impact to determine if additional funding can be obtained ‘intra-corporate’ – in other words within the group. 

Taking a Corporate-wide View  

Corporate treasurers need to know how much funds are available and where they are, because there are multiple sources of information from within the organisation and its relationship banks. There is a single source of truth. 

Looking into the corporate organisation, payments may indicate a shortfall or requirement for short-term funding. Funds could be made available from intra-company loans or transfer from an account held in a foreign currency in another bank. This is particularly true where the organisation has undergone mergers and acquisitions (M&A) and there are separate entities dealing with multiple banks. For example, some eurozone organisations, especially in insurance, which have run as separate subsidiaries have taken advantage of the forthcoming single euro payments area (SEPA) end date to form a common payments factory or corporate payments hub. These structures can be used as control centres for collections and disbursements, with access to information on account balances. 

In the case of account balances which may still be held with multiple banks, some rationalisation may be relevant in order so that corporates can create a virtual account structure or cash pool, bringing together subsidiary accounts into a single bank. That said, care must be taken in terms of the risk of using a single bank – a credit facility is as good as the aggregate sum available through previous multi-bank relationships. 

Corporates can also take advantage of multi-currency clearing in London or Hong Kong, for example. If an urgent payment needs to be made, it should be possible for a euro payment to be made in that time zone. It is possible to use pooled balances in cases where funds may not be available locally, or where this can expedite an urgent payment. 

Improving the Cross-currency/Country Reporting and Pooling Structures

The bank’s role in pooling is to provide immediate or real-time capabilities and to enhance cross-border and cross-currency products and availability of information. Automated sweeping of funds cross-border together with cross-currency notional pooling is available, or becoming available, in many of the global big banks as a tool to ensure the right funds are in the right place, at the right time. However, these systems often run as separate instances and do not have the benefit of real-time access or availability consistently applied across branches. 

If, however, a transfer is required, this is not always done in real time and not always across all currency pairs. Some banks need to ramp up this capability. As real-time payments capabilities, such as the UK Faster Payments Service (FPS), the MAS G3 in Singapore, and recent developments in India, show the expectation of real-time information on allied balances soon becomes a necessity. Banks need to respond to this demand. Ad hoc reports and requests for intraday statements should also be available on-demand. 

Responding to an Immediate Need: Mobile Authorisation

Where funding is required, it is often required immediately and a new facility may have to be set up. Traditionally this requires documentation/application, bank internal assessment and review, and communication of the decision to the customer. This process can take several days, particularly in emerging markets, so new mobile technology, such as an iPhone app, can have a part to play at the front end (application) and back end (communicate decision) of the process. Even if an inked signature is still required, the application can be processed based on a captured facsimile pending arrival of the hard copy. In the case of collateral, can this be pre-registered and then pledged against a facility online.

Another issue can arise where a payment instruction is submitted, yet fails a balance check or needs some form of modification at the bank. Depending on when the payment has been submitted, for example close to cut-off time, and if settlement discounts are at stake, the corporate accounts payable (A/P) department would need to be notified immediately. Today, an alert is not always sent. The concept of actionable alerts is a useful product that banks are starting to offer, whereby the customer is notified through SMS or email, and can then automatically resolve the problem online. 

An E-auction for Receivables?

In a case where the corporate treasurer has decided that funding is best secured from factoring receivables, the process can be lengthy. Is there a better way? One suggestion from a large global IT company treasurer was to put the invoices up for online auction. 

Clearly, information on companies credit ratings and typical payment performance would be required, but as this mechanism would be multi-corporate, profiles could be held centrally, and even provide a useful repository of information for the corporates themselves on customer receivables performance. 

Leveraging the Supply Chain

In the global business world, particularly in retail or manufacturing, a large corporate and its suppliers have a symbiotic relationship. However there is often the case where a small supplier may struggle with the payment terms. In this case supply chain financing (SCF) can play a part, whereby the customer can maintain its payment terms – for example 60 or 90 days – without putting its suppliers out of business. 

The approved invoice becomes collateral for the bank to pay its client supplier on the customer’s risk profile, less a discount depending on the time of actual payment. The logical next step would be for the customer’s bank to become the receivables bank for the supplier, which would then enable extended remittance information to be communicated automatically system-to-system, rather than by email. 

The subject of funding is far more extensive, covering a faster turnaround time in trade finance, the pros and cons of commercial bonds, and so forth, which are complex topics in their own right and relevant to funding. 

Inter-bank Integration

Winning strategies will not solely depend on what a specific bank does itself, but how well it collaborates with partner banks and delivers a seamless service, whether payments, information or funding. This is particularly true in Asia where China is becoming the epicentre of the shift from West to East, and where local banks are collaborating to challenge regional banks. In addition, regional banks are collaborating with local banks to challenge the global players. 

As now demonstrated, funding is a broad subject and far from simple. With new directions in mobility and self-service, technological solutions, such as large and distributed databases coupled with enablers such as cloud computing for better predicting cash requirements, as well as more real time and connected bank information, the process can be made more simple. It’s a question of deploying the right tools at the treasurer or financial director’s fingertips. 




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