Chapter 4 Integrating cash and trade
existing lenders are relying on unpledged
assets, such as receivables, for comfort
of unsecured overdraft facilities. The
treasurer will also want to look into
the future when establishing a funding
structure to ensure that the decision does
not constrain future growth or other plans.
Size of company.
The size of the company and its country
(countries) of operation will determine
some of the funding opportunities
available. Commercial paper programmes
are usually only available to the largest
companies, although in certain countries,
such as France, local markets are
available to smaller companies on the
basis of name, rather than ratings. Other
financing tools may not offer the level of
funding required by larger companies.
Factoring and, to a certain extent,
invoice discounting fall into this category.
Creditworthiness has been seen to be
a factor in determining access to funds,
especially over the last five years.
Central funding or local funding.
For international companies, treasurers
will need to identify whether it is
appropriate to try to arrange funding
centrally, and then to fund the subsidiaries
either directly or through a liquidity
management structure. Central funding
will usually be cheaper (assuming the
group has the highest credit rating),
although it can be difficult to arrange the
level of funding needed by the group as
a whole. Depending on the location of
group entities, exchange controls can
make central funding strategies difficult
to manage, as it can be difficult to
repatriate cash to meet debt repayment
requirements from certain locations.
Allowing or requiring local entities to raise
funds locally may be more expensive for
the group as a whole, and it can result in
inefficiency where some group entities are
cash-rich and others cash-poor. On the
other hand, arranging funding locally can
have significant benefits for a company
seeking to arrange local support for
letters of credit, for instance, as local bank
relationships will develop. More generally,treasurers are often nervous about
arranging all funding centrally, as it does
represent a significant funding risk to the
group as a whole.
Local funding opportunities.
Companies are also constrained by the
liquidity of their local markets. This is
a particular issue in trade, where local
subsidiaries, suppliers or customers may
operate in countries where access to local
finance is particularly difficult. Treasurers
need to think carefully about how to
support transactions with entities based
in these locations. Export credit support is
available for certain markets. It may also
be appropriate for companies to enter
into countertrade agreements in some
circumstances.
Guarantees.
Where funding is arranged locally, central
treasury will need to establish whether
it is going to support local entities by
guaranteeing their local borrowing. This
will reduce the cost of borrowing across
the group, but at the cost of taking on
more risk for the parent and reducing the
central treasury’s ability to raise funds at
the group level.
Tax, accounting and other regulatory
requirements.
Finally, all funding decisions need to be
taken after the impact of tax, accounting
and other regulatory requirements
(e.g. exchange controls) is considered.
For multinational operations, these
implications can be complex.
Although some companies may have very
limited choice, whether because of their
location, creditworthiness or size, all these
variables should be considered as part of the
wider working capital funding decision.Integrating the supply chain
The final opportunity is to view the supply
chain as a whole, rather than see each
entity’s participation in isolation. Assessing
this against the three key objectives outlined
above, there are some definite advantages to
viewing the supply chain as a whole.