FinTechAutomationFreeing working capital – how digitisation makes it easy

Freeing working capital - how digitisation makes it easy

As more smaller businesses follow the multinationals and move outside of their home market, the problem of trapped working capital is increasingly common.

Tied-up working capital is a major issue for any company involved in international trade. Working capital can become locked inside trade instruments, unavailable to other business units for more profitable use elsewhere because of slow paper-based processes or complex regulatory rules.

Sadly, the problem isn’t only confined to large multinational corporations (MNCs). Far more medium-sized businesses are now involved in international trade and given the rise of China and India as manufacturers and exporters, many are suffering the same problems with trapped working capital.

One of the major causes of this phenomenon is that treasury teams struggle to gain timely visibility of their active transactions and cash position across multiple financial institutions in what may be multiple currencies, which leads to funding unnecessary working capital headroom.

Freeing working capital through digitisation

The adoption of digital trade communication and information, combined with cloud-working, has many obvious advantages here – offering anytime-anywhere access and a common interface for multiple partners, banks and counterparties. Above all, it is so much faster than traditional, paper-based processes. The ease of access and vastly increased visibility mean that decisions on releasing working capital trapped inside instruments and credit lines can be made far more quickly. Indeed, one of the most common causes of trapped working capital is that the credit line or bank guarantee that has outrun its original purpose.

Businesses need to examine how they can use this technology to ensure their working capital is bound up for as little time as possible. The starting point should be the identification of pinch points in a business’s processes. Only then can the business move on to achieving faster reconciliation and decision making. All too often treasuries understand what they are spending but don’t have a real-time picture of their bank guarantees and credit lines in order for them to make those key decisions that release working capital.

Optimising thousands of guarantees

Yet achieving this is hard when a company has guarantees with dozens of different banks and only a handful of staff to manage them. One successful example is an engineering and technology company that had 38,000 guarantees issued in more than 100 countries and through 200 subsidiaries.

Everything was based on paper processes and the net effect was that the company could not put tenders together as quickly as project managers required, nor could it manage its credit spread. The company’s local subsidiaries would apply at least once a year for their own guarantee lines, but one of the consequences was that when their usage was very high, they would have run out of their quota just as a big opportunity cropped up requiring millions of dollars of guarantees.

The company decided to consolidate its processes and move to electronic instruments and documentation. The changeover took time and planning, but the result is that it now pays less for credit. Bank guarantees have been consolidated at the group level, with the banks taking the credit risk of the company, offering guarantee lines at cheaper rates. The company’s subsidiaries no longer have to undergo credit risk analysis, or be subject to know-your-customer (KYC) processes.

Having put the right platform in place, the company can ensure its subsidiaries access the funding and secure a guarantee quickly through electronic messaging that is plugged into the lender’s back office. Automation and the elimination of manual processing have substantially cut the time it takes to issue a guarantee. Guarantee instructions can be completed within no more than two hours, with the receipt of a copy of the guarantee by the applicant taking no longer than three working days.

The company’s subsidiaries that have a weaker balance sheet than the business as a whole can secure better pricing, thanks to better leverage with core banks – with savings running into millions of US dollars on guarantee usage of nearly US$9bn. Approximately 50 local systems have been replaced with a single solution, with 30 banks signed up.

The above provides an excellent example of how corporates can free up trapped working capital, achieving agreement with financial institutions to optimise business processes, using a common approach with all of them. This is something that organisations need to arrange with each institution, but with the aim of obtaining a common line of sight over letters of credit (LCs), bank guarantees or insurance bonds.

Once agreement has been achieved, the advance towards digitisation becomes much more straightforward and treasuries can start making smart decisions that free up working capital to fund further transactions or expansion.

Speeding away from the past

Bank guarantees are actually a good illustration of how cash can be trapped when workflows and processes are in the paper past. On the one hand, paper documents can be forged or amended, tying a business up in interminable legal wrangles – while on the other they simply go missing.

A company that has bank guarantees will either find that either they expire and are never called on, or that they need to be amended – reducing their value to facilitate another transaction. When transactions go wrong, information needs to be supplied very quickly in order to make a claim – not couriered around the globe. Similarly, if a project is completed early, a business will no longer want to pay its monthly fees for a guarantee.

Active management of guarantees to maximise efficiency in the face of these challenges requires full visibility and control. Without it, businesses continue to lose out one way or another. This is where electronic documents have the advantage in releasing trapped working capital. Their distribution is constrained only by the speed of light down a fibre cable, while all amendments and alterations remain visible if they are issued on a fully-functioning digital trade platform underpinned by an internationally-recognised legal rulebook. Full visibility and an audit trail ensure that procedures are adhered to.

Digital platforms also allow for rapid confirmation of purchase orders accepted by the parties, opening up opportunities for raising finance. Shipping notes too can be generated electronically which, in turn, can be repurposed as an invoice accepted by the buyer.

In a major transaction at the end of last year, for instance, two significant presences in international trade – HSBC and Indian conglomerate Reliance Industries – jointly achieved a first for international trade in India using digitised documents to settle an export transaction in a single day. This contrasted with the period of between 28 and 35 days typically taken to exchange traditional paper documentation.

Liberating working capital

Digitisation does not have to be achieved in a single Big Bang approach, but can be pursued at the pace best suited to the organisation, integrating platforms one step at a time. The starting point should be the identification of pinch-points in a system, whether it is a question of being paid or receiving goods more rapidly, or releasing credit lines more efficiently. A business does not have to leap into digitisation, but can instead opt for a mixed system and gradually shift to electronic processes, to reap all the rewards in efficiency and cost.

With this solid foundation and such obvious benefits, it is time for digitisation to be seen as the primary means by which trapped working capital will be liberated for more profitable deployment.


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