Cashing In: Trade Finance Fuels Working Capital, Boosts Sales

Earlier this year, the treasurer at a clean energy company found himself in a precarious position: the company needed cash in the door faster to fund operating expenses, but the corporate’s annual revenue is heavily reliant on a few large clients who had negotiated long payment terms. At a recent meeting of NeuGroup for ESG, the treasurer dug into the details of a project that leveraged a strategic partnership with HSBC to offload the receivable to the bank and get paid sooner.

• The company, whose business relies largely on selling a single product, has lopsided payment cycles, with the bulk of revenue coming in at the end of every quarter. The treasurer said this led to a “dry period in the middle” of each quarter, which required a solution to maintain cash balances for daily expenses including payroll.
• HSBC which offers a variety of Global Trade Solutions, worked with the energy company to purchase the receivable while the company continued to offer the client attractive payment terms. So without jeopardizing the relationship, the NeuGroup member company was able to get the cash it needs up front and minimize its counterparty risk—allowing it to expand sales to the buyer.
• This structure takes into account the varying credit profiles of the energy company and its client, the balancing of seller and buyer risk, the company’s need to ensure sales are not jeopardized and its desire to improve working capital.
• In the session, Vivek Ramachandran, HSBC's head of Global Trade Solutions, said, “the upside is huge: they get early access to cash flow and can build up capacity a lot quicker, even with long-term contracts.”

Shorter cash conversion. The treasurer shared that the company has a “constant need to reduce pressure that comes from working capital requirements,” which he described as growing pains—a good problem to have. Because sales cycles often range from nine to 12 months, working capital forecasting isn’t easy.

• Mr. Ramachandran said HSBC is well-positioned to enable solutions to address challenges like this. “We have a view not just of companies themselves, but also of their counterparties,” he said. “For this transaction, we had a relationship with the buyer, and worked with them to structure payment obligations that also reduce risk.”
• The treasurer said that the deal had very specific boxes to check, which required a partner bank willing to create a bespoke solution. “The deal had very long terms, which you won’t always see, and the amount was very significant,” he said. “The pricing had to be reasonable as well, in sync with our working capital needs. HSBC had to basically make sure everybody is winning, and make a margin—but now we are all able to win.”

Treasury’s strategic opportunity. The member added that treasurers have an opportunity to enhance working capital at all companies by breaking down silos and collaborating with the business. “Step into the other world, whether it’s sales or pricing procurement, and you might see opportunities,” he said. Finding those opportunities is becoming a requirement for strategic treasury teams.

• “Sometimes, I’m having discussions with vendors on payment terms, or working on a financing solution for customers,” the member said. “Normal, conventional cash and risk management is no longer enough for treasurers.”
• He added that this is especially vital for growing companies in unconventional industries like clean energy, but “treasury is changing across the board.”
• Mr. Ramachandran added that “the more visibility treasury has into buyer contracts, the easier it is for banks like us on both sides of the transaction to inject financing that releases working capital.”
  • “I think the world of trade will change a lot,” he said. “The conversations we're having do not sound like historical trade finance conversations, because working capital optimization is going so much further now: it's not just financing a receivable, it's part of a broader capital structure discussion now and how companies can optimize their sources of capital, with trade finance now being one of them.”