Maximising Liquidity in an Asset-Based Structure
Middle-market companies have always relied on asset-based lenders for working capital. But with the need to maximise profitability, companies are looking at every facet of their business – especially the optimisation of cash flow. As a result, they are turning to their asset-based lender for treasury management services in addition to a revolving line of credit. With the advent of the Internet, image processing and other technological advancements, many treasury functions that used to be performed internally such as consolidating account balances and accounts receivable processing can be off-loaded to lenders. Companies are discovering that they can achieve greater operational efficiency while improving control and increasing liquidity by leveraging a broad range of treasury management services.
Today, most asset-based borrowers use a variety of traditional treasury management services. Information reporting – the ability to receive transaction histories and account balance information – is the core treasury service and most often goes hand-in-hand with a credit facility. Lock box processing and controlled disbursement, which enable companies to collect and concentrate cash receipts and tightly manage payables, are also among the traditional services. Recent advances have made them even more valuable to companies seeking to maximise liquidity.
Lock boxes have been a boon to corporate treasurers and asset-based borrowers for a number of reasons, the first being improved mail time float and collection float. Lock boxes speed the time it takes to collect and clear accounts receivables by routing all incoming checks to a central location using a unique zip code. For example, a company with multiple locations receives checks from customers across the country. To determine the optimal city from which to collect and process its accounts receivables, the lender may conduct a mail float study to measure the amount of time it would take to receive mail from these various locations. The optimal location is selected to establish a lock box usually with the goal of reducing the float time by at least half a day. In addition, by scanning the incoming checks and associated materials the company receives a data transmission on the same that day incoming checks are collected, which allows it to match against its receivables ledger. This enables the company to limit human intervention to exception-only items and to reconcile its cash position more efficiently and accurately.
The mail float savings coupled with same day receivables information means the company should be able to post incoming cash a day and a half sooner, allowing for more precise cash forecasting and closer management of borrowing needs.
Aside from faster cash application, image-based lock box processing offers other benefits. Since the bank creates high-quality, scanned images of the documents, companies can experience significant savings associated with shipping, filing and storing of paper. Stored images also are accessible online to other departments such as credit and customer service. If a shipment to a customer is being held up pending payment, it’s easier and faster for the credit department to be alerted that a check has been received so it can release the product. The same is true of customer service. Prior to imaging, if a customer had a question about a payment, resolution required a series of phone calls as well as copying and re-filing of paper documents, a process that could take several days. With imaging technology, document review can be done online and issues can usually be resolved during the initial inquiry.
Lock box processing is just one aspect of the remittance collection. With the use of electronic means of payment on the rise, efficient collecting and posting of paperless receivables is equally important to maximizing use of available cash. Previously, merchant card transactions were reconciled manually using paper statements. With online access, credit card payments can be reconciled daily, again giving the company the use of those receipts much sooner. By tapping the bank for both image-based lock box processing and web-based merchant card processing, the company has effectively improved float and designed a receivables management solution.
The other side of the working capital equation is the ability to manage available cash for as long as possible through controlled disbursement. Companies that have asset-based revolvers need accurate, daily disbursement totals to ensure that they aren’t borrowing more than they need on any given day. Typically, checks are funded when issued, but it can take several days before they clear. On large checks, the amount of float can be significant. By utilizing a special transit number and disbursement point, controlled disbursement allows the corporate treasurer to fund checks the same day they are presented for payment.
Positive pay is a service that’s increasingly being used in combination with controlled disbursement. It is a relatively recent innovation to help protect companies from the burgeoning problem of check fraud. Positive pay, which uses imaging technology, is a service in which the bank compares checks presented for payment against the customer’s check issue file. The bank creates a paid file daily and runs a match against the customer’s issue file, and then highlights any that don’t match as potentially fraudulent. The company then makes a decision as to whether disposition should be made.
Other disbursement strategies that can increase the float on payables and manage expenses include purchase cards. A purchase card is similar to a corporate credit card but has built-in controls such as where it can be used, who can use it or how much can be charged on a given day. Depending on the employee to whom they are issued, items purchased may be limited to office supplies or travel and entertainment. Purchase cards take the paper out of the purchase order and expense reimbursement process reducing internal costs while maintaining control of approved payments. By providing Internet access, the transactions can be verified online and assigned to the appropriate cost centres and posted to the general ledger automatically. Reconciliation occurs daily, enabling the company to manage its credit exposure more efficiently.
On the payroll side, group banking, which allows the company to offer benefits to employees such as free checking with direct deposit and discounts on loans is a popular service. Group banking programs can help increase the number of employees who will consider direct deposit. This helps companies reduce their payroll expense because the cost of issuing and reconciling payroll checks is reduced considerably when employees have their checks deposited automatically.
Companies have a lot of choices today when it comes to providers of treasury services. But because of the nature of the asset-based relationship, there are inherent synergies when the credit facility is coupled with lender-provided treasury management services. Consolidated reporting is one reason. Logging into a single bank system saves time and money. The process of paying down the revolver each day is also reduced. If receipts are in multiple financial institutions, there’s a cost associated with moving the money. Whether a company is in borrowing or investing mode, it needs an early morning clearing figure, which controlled disbursement can supply. This will identify the amount of cash the corporate treasurer will need to fund the day’s disbursement total. Borrowing then can be automated by linking the disbursement funding total to the revolver. On the investment side, clearing through the lender gives the company access to information early enough to strike a daily cash position and reap the benefit of additional investment income.
For the lender, there’s also credit exposure associated with some treasury services. Working with the same institution makes credit approval that much easier because underwriting occurs only once. Take merchant credit cards, for instance. With credit card processing, there’s automated clearing house exposure related to issues such as charge-backs and the timing of different types of settlements. Companies can present their financials once, work through their lender to identify all of their needs, and include them in the standard underwriting. That way there’s no need for separate facilities for treasury management exposure.
In addition to the services described above, working capital solutions available to the borrower include letters of credit, foreign exchange, derivatives and investment services. Borrowers typically start with one of the traditional treasury management services such as lock box processing or controlled disbursement and build from there. With the increased use of these services, the lender is more than just a source of capital. With the treasury management tools and technology now available, borrowers are armed with more accurate predictions of liquidity requirements. As a result, senior managers and equity sponsors can make the best possible operating decisions for the business as a whole.