How to Find the Right Financing Partner for Increasing Working Capital Requirements? | Güven Aytaş, EMBank
Working capital is located at the very core of any business. It determines the balance between a company’s assets, receivables and liabilities.
Any disruption in either part affects the working capital, and consequently, cash flow and the operational cycle. Such disruptions may be triggered by micro and macroeconomic factors. Their effects range from missing procurement opportunities to sourcing crises, lockdown of operations or even bankruptcy.
The current factors affecting working capital requirements
Currently, we are facing the financial aftermath of the Covid-19 pandemic: an 8.5% decline in the volume of international trade of goods and services in 2020. This marks one of the deepest real output and trade reductions since the end of WWII.
On top of that, financial disruption is boosted by the ongoing Russia – Ukraine war. Due to its effects, economists from World Trade Organization have downgraded their expectations for the 2022 growth of global trade volume from 4.7% to 3%.
Due to Covid-19 and the ongoing war, both the availability of money and resources has become an issue. Both incidents have disturbed the working capital balance for many companies on a global scale, especially for those that depend on production. Such companies rely on a well-functioning supply chain and stable raw material costs.
For instance, Russia is one of the biggest players in iron and steel production. However, due to increased costs, previous buyers are unable to meet their iron and steel requirements. Seeking alternative locations, such as China, may introduce another issue. While Russian delivery can be done in 30 days, Chinese delivery may be in 90. The unexpected deferment would disturb the cash flow routine and eventually working capital financing may become necessary.
There are two determinant factors for stability in production:
1. Obtaining the resource when it is available: It is vital to be able to reach the raw materials at the right time and for the right price.
2. Collecting the receivables after the product is sold: A stable collection directly affects the cash conversion cycle for the producer to keep up with its operations.
For instance; due to the microchip crisis we’re facing now, either the production is halted or the cost has become critically high for many industries, especially automotive and electronics. The scarcity of resources causes a problem of allocation as in “which companies will be the ones to confront the rarity and high costs?”
The chain reaction affects the whole industry. The giants in these industries have numerous suppliers, whose operations are stagnated although they have nothing to do with microchips directly.
The reputational risk appears as another threat for companies with halted or limited production. In such conditions, meeting the working capital requirements is of vital importance to sustain the operation. Working capital loans provide the solution to ease access to financing.
How should companies approach working capital financing?
Geopolitical conflicts and global incidents like Covid-19 will always be around. We have already experienced the subprime mortgage crisis in the United States which contributed to the 2008 global financial crisis. In such times of financial turbulence, the ability to find the right partner and financing at the right time become prominent factors.
Companies should also have well-planned allocation and diversification of resources to increase adaptability for changes in micro and macro scales. The inability to cover the increasing costs of a resource hinders the undergoing profit. Finding the right financing partner becomes as vital as finding the resource itself in this case. If both requirements are bundled together, then a healthy cash flow cycle becomes accessible.
The right financing model should be sustainable and long-termed in a mutually beneficial win-win condition. Banks closely examine working capital loan requests. They analyze and understand the cash flow cycle by following not only the loan applicant but also their clients to ensure healthy collateral. Businesses should also take into consideration the decreasing availability of cash in states of crisis. This may lead to an alteration in the perspective of banks towards a much more selective acceptance in terms of financing.
How can EMBank can help with working capital requirements?
European Merchant Bank (EMBank) aims to act as a partner seeking the most suitable way to enable mutual benefit and provide the applicants with sound solutions to keep conducting their operations.
We analyze the cash flow and local & global trade operations of our working capital loan applicants and find the right financing model for them by examining:
● Where the resources are obtained and where the product is sold
● The flexibility in allocation and diversification of resources
● Measures to be taken when supply and collection are at stake
● Which countries and industries are included in the trade
We offer financing alternatives tailored for each applicant as a result of the analysis. We provide medium to long-term loans as well as Line of Credit.
If you require working capital financing, we’d be happy to hear you out and provide you with the working capital loan options for your needs.
 OECD Trade Policy Paper – The Impact Of Covıd-19 On The Dırectıons And Structure Of Internatıonal Trade
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