Selling to the world? Understanding all the options and solutions for optimizing working capital as part of a broader financing strategy is an imperative for all businesses, especially for those that engage in global trade, says Inwha Huh, HSBC’s Global Head – Structured Trade Solutions, Global Trade and Receivables Finance.
An ideal working capital strategy includes a mix of solutions that addresses various aspects of a company's cash-related needs - from cash flow and payments to financing and balance sheet management. Ms. Huh highlights a key component of this comprehensive strategy that many Canadian companies overlook: receivables finance.
“Using receivables to manage your working capital and to address a number of other business needs - that's something not many Canadian companies are actively doing today,” says Ms. Huh. “Of course, at the mid-market level, Canadian companies have long been using their invoices to access financing, but they are structured in a way that adds leverage to their balance sheet.”
At the same time, these products tend to greatly limit what companies can borrow and in many cases the cash isn't available immediately.
Receivables finance provides a holistic solution that addresses the key needs of today's global companies. Ms. Huh points to four areas of concern that are common to most enterprises that do business in foreign markets: mitigating credit risk, managing international growth, financing without incurring more debt, and improving balance sheet management.
As an integral part of a larger working capital solution, receivables finance that's structured properly and delivered by the right partner can address all of these concerns, says Ms. Huh.
As a starting point, true sale of receivables provides an alternate source of working capital by allowing companies to get cash for outstanding invoices before those invoices are due for payment.
Another benefit of including receivables finance in a working capital strategy is that it enables companies to immediately reduce their credit risk - a particularly significant concern for businesses that buy and sell overseas.
“A lot of companies are not set up to manage credit risk, particularly as their customer base grows in countries they are not familiar with,” says Ms. Huh. “Through this solution, you end up naturally outsourcing your credit risk management to a financial institution.”
Receivables finance can also be an invaluable resource for supporting companies with strong growth. It is not unusual for fast-growing companies to find themselves challenged to finance a large order or to pay for next-level expenditures such as additional employees or a bigger warehouse. With receivables finance, these companies can quickly unlock an existing capital asset to drive growth and pursue more opportunities.
“It would also be a great solution for companies in cyclical sectors,” adds Ms. Huh.
Unlike other forms of financing, such as a loan or line of credit, if structured properly, companies may be able to use receivables finance as part of a holistic working capital solution - one that helps reduce the leverage on their balance sheet, which can open up more financing options as well as favourably position the business for further acquisition to fuel growth.
“This may be a great way to get financing without increasing your leverage ratio,” says Ms. Huh. “If structured properly, true sale of receivables to a third-party may result in cash against your receivables, not debt on your balance sheet.”
Ms. Huh adds that whether it's industrial or aviation, consumer retail, agri-business, automotive or other sectors, receivables finance has been a very useful tool in all sectors and is very common in other markets around the world - “Canadian companies are now becoming more aware of the benefits of receivables finance, so I think we're going to see more of the need in Canada.”
Given the global trend towards more stringent balance sheet management - with chief financial officers increasingly focused on tracking working capital metrics - building a comprehensive working capital strategy with the right mix of solutions and tools is a must for any company, whether it is operating globally or staying within domestic borders.
“That's one of our unique strengths at HSBC,” says Ms. Huh. “With our global network, local presence and holistic global trade solutions, we help buyers and suppliers connect around the world and across the supply chain.”
It would also be a great solution for companies in cyclical sectorsInwha Huh, HSBC’s Global Head – Structured Trade Solutions, Global Trade and Receivables Finance.
The information presented is not meant to be comprehensive and does not constitute financial, legal, tax or other professional advice. You should not act upon the information contained in this document without first obtaining specific professional advice. While reasonable care has been taken in preparing this document, HSBC does not make any guarantee, representation or warranty (express or implied) as to its accuracy or completeness. In particular, accounting treatment applicable to a receivables financing structure varies depending on many factors, including the attributes and behaviour of the participant buyer or supplier. HSBC makes no representation or warranty as to the accounting, tax or legal treatment of the products described herein. The information presented in this document is subject to change without notice.
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