Shikha Kalra (Corporate Solutions): Navigating Financial Challenges with Receivables
Shikha Kalra, Senior Director, In the current economic climate, characterized by high interest rates, inflationary pressures, and geopolitical uncertainty, businesses across industries face a difficult set of financial challenges. Amidst this turbulence, access to liquidity is key for sustaining operations and driving growth.
Demica's extensive data, with $160 billion in trade volumes processed through its platform annually, illustrates the widespread impact of these economic headwinds. Many industries such as Computer and Information Technology, Transport and Logistics, and Paper and Packaging have experienced a consistent downward trend in trade volumes, since the initial spike during Covid in 2020.
@DR
Receivables Financing – A tool worth exploring!
Open account receivables finance, which includes the family of products including, factoring, securitisation and receivables purchase enables businesses to release cash by monetising outstanding invoices. Often, once these facilities are in place they form a permanent part of the corporate capital structure.
The benefits of such financing include:
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typically a cheaper cost relative to senior financing as these facilities are ‘asset-backed’,
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improvement in liquidity, capital efficiency and working capital metrics,
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potential non-recourse and off-balance sheet nature of transactions,
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diversification of funding sources,
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generally, facilities tend to grow with the growth of business,
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in many cases, facilities can be centralised covering operating subsidiaries in multiple jurisdictions spread across the globe.
The product family is typically suitable for B2B businesses of credit ratings ‘B-’ or higher with accounts’ receivables ranging between $20mn-$1bn+ to attract sufficient funder interest in an opportunity. There can be exceptions of course! The funding universe includes various trade and working capital and/or securitisation teams of banks, factoring houses (the biggest being owned by large European bank groups) as well as the new age ‘private credit’ lenders. Although there are public securitisation deals from corporates, majority of these transactions tend to be ‘private’ and therefore, detailed information is not easily available.
What is receivables’ finance?
In simple terms, in a receivables’ finance facility, a seller ‘sells’ the receivables from its customers on to a funder. In return the funder provides cash up to a certain percentage. A smaller part is retained to account for perceived risks of credit, dilutions and yield etc. In more complex structures such as Trade Receivables Securitisation, a bankruptcy remote special purpose vehicle (SPV) may be used for initial purchase of receivables from the seller. Note that receivables’ finance is not a replacement for good
processes and operations to manage working capital. In fact, the latter also support more efficient receivables financing as funding availability in these products typically relies on the performance of the receivables’ portfolio. It does take some upfront effort to set up the financing structure in terms of data gathering and analysis, legal documentation, funder due diligence and finally the set-up of required reporting processes as transactions rely on regular data reporting in relation to accounts receivables. Demica’s mission is to make working capital finance easier and accessible to as many businesses as possible. The Demica team works closely with Treasury teams to make the process easier. Demica has one of the largest professional
services teams in the sector to guide clients through the set-up of their programs. The team works closely with the corporate treasury teams providing support in addressing the data challenge and navigating this largely opaque funding market referenced earlier. The market-leading Demica platform enables corporates to automate, monitor and report on their programs with ease.
In summary
As businesses confront the complexities of today's economic landscape, the role of liquidity management cannot be overstated. By harnessing these financial tools effectively, businesses can enhance resilience, optimize cash flow, and capitalize on opportunities amidst adversity.
Meet Shikha Kalra:
Shikha is a senior member of Demica’s corporate solutions team. With a career spanning more than 20 years, Shikha has honed her expertise in banking, finance, and advisory roles across diverse geographies, including the US, Europe, Asia, and the Middle East. Throughout most of her career, she has been focussed on receivables’ and supply chain finance. Shikha has an MBA from Harvard Business School (HBS) and a post-graduate diploma (Masters) from the Indian Institute of Forest Management (IIFM).