Your Guide to Working Capital

Understanding Working Capital

Before diving into the world of financing solutions, it's essential to grasp the concept of working capital. Simply put, working capital is the difference between a company's current assets (e.g., cash, accounts receivable, inventory) and its current liabilities (e.g., accounts payable, short-term debt). It represents the funds available for your daily operational needs.

Financing Tools to Optimize Working Capital

Optimizing working capital involves striking the right balance between liquidity and profitability. To achieve this, various financing options are at your disposal:

• Trade Receivable Securitization: In this financial technique, trade receivables are bundled into a pool and financed directly by lenders or the capital market. It provides an alternative source of financing and can optimize your capital structure.
• Factoring: Factoring allows you to convert your accounts receivable into immediate cash. It involves selling your invoices to a financial institution or platform at a discount, which can be a valuable solution for improving cash flow.
• Supply Chain Finance (Reverse Factoring): This method involves collaborating with your suppliers to improve cash flow across the supply chain. By providing this option for short term funding to your suppliers, you can enhance those relationships and optimize payment terms.

Trade Receivable Securitization: Unlocking Hidden Value

Trade Receivable Securitization (TRS) is a financing method widely used for companies with large pools of trade receivables. The TRS market has become developed with various funders being active, ranging from fintech platform providers to more traditional banks. This raises the question of which financing partner aligns most suitably with the requirements of your organization. It is worthwhile mentioning some of the benefits which TRS can bring to you:

• Diversify Funding Sources: Access alternative funding streams by securitizing your trade receivables.
• Enhanced Liquidity Management: Better manage your working capital by turning trade receivables into immediate cash.
• Tailor made: Typically, TRS structures can be tailored to suit your organization’s specific needs (multi-jurisdiction, multi- currency)

Factoring: Turning Receivables into Cash

When it comes to smaller and less diversified pools of trade receivables, Factoring can be a good solution to enhance the working capital of your organization. Again, there are many financing options here with a number of both fintech and bank solutions available. A few of the benefits of Factoring are:

• Immediate Cash Flow: Convert outstanding invoices (at a small discount) into cash promptly, ensuring you have funds available for immediate needs.
• Reduced Credit Risk: Shift the burden of collecting on outstanding invoices to the factor, reducing your credit risk (in case of non-recourse Factoring).

Supply Chain Finance: A Closer Look

Supply Chain Finance (SCF) deals with the liability side of your balance sheet and more specifically with your trade payables. Setting up a SCF program can benefit both your organization as well as your suppliers. Through SCF, you can:

• Enhance Liquidity: Improve cash flow by optimizing payment terms with suppliers, reducing the strain on your working capital.
• Strengthen Supplier Relationships: Collaborate with your suppliers to offer them early payment options
• Optimize Inventory: Through better visibility into your supply chain, you can minimize excess inventory, further freeing up cash.

Conclusion

While there are many tools for funding both your trade receivables and trade payables, finding the right one and right partner which best meets your organization’s needs can be a challenge. Our team of experts is here to assist you in identifying the optimal working capital funding strategy and partner for your business. Whether you are a start-up or a well-established corporation, our advisory services are tailored to your unique needs. We provide customized solutions, leveraging our deep industry knowledge and Deloitte wide expertise to help you achieve sustainable growth and financial resilience. Our fully independent team will help you: identify and choose the best financing tool for your organization, help you prepare for the financing process in any means necessary, run a Request for Proposal (RfP) process with a wide selection of parties to give you the best solution, aid you to identify the best partner, help you navigate the documentation stage and see the project through until finilisation.

In an ever-evolving business landscape, optimizing working capital is the key to unlocking your company's full potential. Partner with us, and together, we'll navigate the intricacies of working capital funding, turning challenges into opportunities and financial stability into growth.