The Business Times: Bridging the cash flow gap, with receivables financing

AS A player in the non-destructive testing (NDT) space, Singapore-based A-Star Testing & Inspection (Asti) relies on a pool of over 300 technicians and inspectors to inspect pipelines, tanks and marine infrastructure for major oil and gas companies.

Given the critical role its employees play in ensuring equipment and infrastructure safety, talent retention for the company is key, said Gopal Balakrishnan, managing director and chief executive of A-Star Group, which Asti sits under.

NDT is a testing and analysis technique used across industries to evaluate the properties of a material, component, structure or system without causing damage.

Yet delayed payments from its clients often left the third-party inspection company with a stubborn working capital gap. With wages forming the bulk of its operating expenses, Asti soon found it increasingly challenging to pay its staff on time.

According to a 2018 global survey on trade finance by the International Chamber of Commerce, about 80 per cent of global trade still takes place on an open accounts basis, which means that goods are shipped and delivered before payment is due.

Cash flow management is therefore a common challenge for firms that sell to customers on long credit terms.

Asti only bills clients upon its completion of a job. While clients are usually required to make payment between one and three months after receiving the invoice, delays are inevitable, noted Balakrishnan.

To plug the interim liquidity gap, the company turned to overdraft facilities and business term loans. It also worked with traditional factoring companies – though none of these solutions proved ideal.

“It’s a tedious and time-consuming process. First we’d need to print out and sign all our internal documents, then scan and send them to our customers, who will need to review and have these documents endorsed by multiple departments. The factoring company needs to review the paperwork too,” he said.

The arrival of the Covid-19 pandemic only exacerbated these inefficiencies.

As most of Asti’s administrative staff were working from home, it was difficult to obtain the necessary signatures for paperwork, pushing timelines back further. As a result, it could take up to a week or even longer for Asti’s staff to be paid, he noted.

For Balakrishnan, any delay in salary payments could cause Asti to lose valuable employees, which would negatively impact its business growth.

Unlike some other firms which outsource their staff, Asti maintains a pool of technicians and inspectors under its own payroll. This allows the company to easily cross-deploy its employees to multiple projects, in turn achieving economies of scale.

“Managing that working capital gap is hence critical,” he said. Besides Singapore, Asti has a presence in Malaysia, Indonesia, Bangladesh, Ghana and Brazil.

Delayed payments could also result in the company losing key suppliers. Asti is dependent on a small pool of overseas suppliers from markets such as Canada, Germany and the United Kingdom, and has few alternatives to turn to.

“We buy equipment and accessories like isotopes and chemicals; only one or two suppliers have this. We’ve faced significant challenges before in the past when they stopped their shipping and did not release their goods to us, because there was a delay in payment,” said Balakrishnan.

“This results in a chain reaction. If we’re unable to accept bigger jobs or deliver our services to customers on time, we end up losing opportunities to our competitors.”

With that, Asti had to find a suitable solution to manage its cash flow – and fast. In mid-2022, it sought assistance from HSBC and shared its pain points with the bank.

Taking into account Asti’s sales patterns and customer payment behaviour, HSBC recommended Receivables Finance (RF) – a fully digital solution that enables the company to raise cash against its outstanding invoices, without waiting months for payment.

Upon request, funds can be drawn flexibly according to cash flow requirements, and accessed within minutes.

Next, Asti was invited to submit a financing application in HSBC’s new Digital Receivables Finance platform. It had to review a pre-filled questionnaire and upload its accounting data; this data was then taken and assessed by the platform’s artificial intelligence system, as part of an internal credit assessment.

Within two days, the bank made an offer to the company on how much funding it could provide. Asti’s RF facility was activated in December 2022, and their first funding was drawn down in end-January.

For Balakrishnan, gone are the days of having to rush down to a bank to submit a stack of hard-copy forms. When his company wants to raise cash, all it needs to do is submit its invoices on HSBC’s electronic Receivables Finance (eRF) platform.

“Once we upload the invoice into the system, we receive cash immediately, instead of having to wait months for our clients’ payments,” he said. “It’s also more environmentally friendly, as everything is digital.” The platform affords Asti an overview of its RF facility, such as outstanding unpaid invoices submitted and the available funds that can be drawn down.

Besides providing just-in-time financing, the RF facility gives companies the option of saving on interests when borrowing is not required. This provides them with more control in managing their interest expenses amid a rising interest rate environment.

Asti’s gains have been substantial. Since activating its RF facility three months ago, Balakrishnan said the company now has the confidence to undertake more projects – for instance, it recently secured a big petrochemical project with an oil and gas firm.

The solution has helped the film reduce its reliance on more expensive overdraft facilities and business term loans, which are not always guaranteed, he added.

“With cash flow crunch, we’d always be wondering if we can cope with certain projects and would likely be more conservative about taking them up. But now that our cash flow has improved, our revenue from certain customers has doubled.”

Asti has also managed to improve its working relationship and negotiating terms with its suppliers, who are now paid on time. This has indirectly generated cost savings for the business, he said.

The company will be working on several of its own automation and digitalisation initiatives, as it seeks to make the move to Industry 4.0. This includes developing an internal cloud server to store all of its documents, which Balakrishnan says will be complementary to HSBC’s RF facility.

As business volumes increase in today’s post-pandemic landscape, having access to working capital financing takes on an even bigger focus for companies, both big and small.

This is especially the case for small and medium-sized enterprises (SMEs) in the services industry, said Iain Morrison, country head of Global Trade Solutions at HSBC Singapore.

Not only do such firms have limited cost-efficient financing options, they also face higher costs from manpower and day-to-day operations, which are likely to have a knock-on effect on their working capital.

“It is common practice for SMEs to give credit terms to their buyers for 30 to 90 days, and any delays in payment can put pressure on an SME’s cash flow,” he said.

Meanwhile, the bank highlighted how challenges in contingency planning, demand forecasting and logistics during the pandemic have contributed to increased inventory levels.

According to HSBC’s Global Supply Chains 2023 research report, 84 per cent of corporates in Singapore are holding excess inventory because of reasons such as Covid-19 restrictions, increases in freight rates and in preparation for future disruptions. The average excess of inventory was 33 per cent above normal levels, the report revealed.

Said Morrison: “The global supply chain disruption brought on by the pandemic has magnified the concerns of sellers in respect to the uncertainty of receiving payments from their buyers on time, and their ability to obtain sufficient financing to bridge working capital gaps.”

HSBC’s Receivables Finance (RF) solution hopes to solve some of these pain points. As receivables financing is linked to the company’s sales, the amount of financing grows in tandem to meet its growing business needs.

“Prompt access to funding is a key enabler to business growth,” said Morrison. Through its electronic Receivables Finance platform, clients can request for funding on their invoices in a matter of seconds.

About 32 per cent of Asian companies today fund their supply chains using receivables financing, up from 27 per cent in 2021, said HSBC’s report. In Singapore, the share of HSBC’s customers that use receivables financing to fund their working capital and supply chain has grown to 35 per cent.

These numbers may not come as a surprise. As compared to loans or overdraft facilities, receivables financing offers credit protection for clients against risks of non-payment from buyers, said Morrison. In open account trade, sellers are often exposed to counterparty risk.

“This gives our clients the confidence to focus on growing their business, granting open account terms to their buyers while remaining protected against bad debts in the event of buyer’s inability to pay due to financial difficulties.”