Ad Hoc Working Capital and the Diversification of Liquidity

Toyota supply chain Rainer Plendl/Adobe Stock

You can have any color you want as long as it’s black. — Henry Ford

Henry Ford laid out the ultimate Hobson’s choice to his customers. A Hobson’s choice is when you are presented with what seem to be multiple opportunities of choice, but in truth you’ve been given a single option.

Thankfully, when it comes to working capital and liquidity today, there are more options than just black. Almost all companies have some form of permanent capital to fund their business operations. Even the smallest companies typically have an overdraft facility or business line of credit with their bank. Larger companies are serviced by an array of conventional (banks, factors, ABL) and non-conventional (asset managers, insurers, specialty finance) financial firms.

Until recently, however, the idea of ad hoc working capital to supplement more permanent forms was not a reality, since the combination of technologies such as e-invoicing, dynamic discounting, API integration and supplier portals were being developed along with third-party sources of capital. But through rapid B2B digitization and more widespread deployment of purchase-to-pay and supply chain collaboration platforms, companies now interact with their buyer-supplier ecosystems in new ways that enable and simplify ad hoc working capital. Sellers now have new options for early payment, which can enable them to quickly inject liquidity at specific times (e.g., at quarter end) or ad hoc (when cash is needed) or even on a more permanent basis. These solutions provide extra liquidity at specific times, like an “option value” to a company — that is, the ability to opt in when a treasurer needs cash.

Ad Hoc Solutions Can Come in Many Forms

Many companies sell a significant percentage of their goods or services to OEM and large enterprise customers. Many of these larger buyer enterprises have offered various techniques to provide early payment, which can be categorized into three buckets: (1) p-cards, (2) dynamic discounting through the OEM or buyer themselves or (3) some form of third-party supply chain finance.

Examples of third-party supply chain finance include:

  • Buyers self-funding using third-party or homegrown early payment solutions. Buyers use their own cash to retire a receivable early based on a sliding scale (i.e., the earlier the payment, the bigger the discount).
  • Purchase-to-pay solutions using third-party finance. With an approved invoice from a network (e-procurement, OEM-dealer, e-invoicing), these networks can fund the invoice with third-party capital.
  • Digital supply chain finance. This solution enables invoice finance for sellers on and off a P2P platform without requiring buyers to sign irrevocable payment undertakings.
  • Working capital platforms where sellers name their price of funds. Suppliers provide a rate at which they will discount their invoice for early payment. This is a significant point of distinction, giving suppliers the ability to set their own price for early payment.
  • LIBOR-based supply chain finance offered by large buyers to their key suppliers using their credit rating. A solution that enables a buyer to lengthen their payment terms to their suppliers, while providing the option for their larger suppliers to access funding or receivables to the buyer early based on the buyer’s credit rating.

While the above techniques in practice can work quite differently from an operational, credit and accounting standpoint, one thing is clear: they have created an option for liquidity at specific times as needed.

And as we all know, choice is typically good (e.g., Hobson choices), especially in this time of tightening credit.

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