By: LiquidX
According to the Federal Reserve, inflation has slowed since the middle of last year, but still remains well above the Federal Open Market Committee’s (FOMC) objective of 2 percent. Even with signs of inflation easing, it remains top of mind for businesses in what continues to be a volatile market as we look to avoid the harshest tolls of a recession.
There are a number of economic trends that have led to the inflationary environment we are currently experiencing. These include:
- Low interest rates, which have made it easier for businesses to borrow money and making it cheaper for consumers to buy goods and services.
- Increased disposable income, impacted by the level of consumer spending on goods and services.
- Unexpectedly strong economy post Covid, including strong labor markets, robust household consumption and business investment, and better-than-expected adaptation to the energy crisis in Europe (IMF).
- Subsequent rise in inflation, caused by an increased demand for goods and services, reduced supply of goods and services (disrupted supply chains), increased energy prices and increased energy prices.
Rising Interest Rates & a Projected Slowdown in 2023
Interest rates have risen at the fastest pace on record. The aforementioned trends have combined to create an inflationary environment that is likely to persist for some time. To combat inflation, the Federal Reserve has been raising interest rates both swiftly and aggressively, with the goal to slow the economy down enough without causing a recession. As a result, U.S. inflation rates currently remain at a multi-decade high. According to the World Economic Forum (WEF), the 2022 rate hike cycle was the fastest in history, reaching a 2.36 percentage point increase nearly twice as fast as the rate hike cycle of 1988-1989.
Economic slowdown signs have started and are anticipated in 2023. The risk of a recession in 2023 is real, but not necessarily inevitable. According to S&P Global, current Q2 conditions indicate a resilient economy despite challenges. There are, however, a series of factors that could contribute to an economic slowdown in 2023. These include:
- Rising interest rates, making it more expensive for businesses to borrow money, leading to slower investment and hiring.
- Higher inflation, which will erode consumers’ purchasing power and could lead to slower spending.
- Geopolitical turmoil, like the ongoing trade war between the U.S. and China, could disrupt global supply chains and lead to higher prices for goods and services.
While the Fed is closely monitoring the economy and adjusting its policy as needed, it can successfully engineer a soft landing, and our economy could continue to grow at a moderate pace in 2023.
Corporates are preparing for this with various measures, but one that is often overlooked is the anticipated impact on DSO.
A slowing economy means potential delays in collections from customers. This, in turn, will have an impact on average DSO (Day Sales Outstanding). While a high DSO is likely to have a negative impact on a company’s profitability, as it results in lower sales revenue and higher costs, a low DSO is likely to have a positive impact on a company’s profitability, as it will lead to higher sales revenue and lower costs.
Corporates can manage this by using true sale financing of AR as a way to collect AR early and off-set the potential impact of slow paying customers. Automating the AR process via software to track invoices, send our reminders, and collect payments is a leading solution to reducing DSO and amplifying profitability. This solution also allows for reducing customer risk by transferring counterparty risk to funders and increasing sales when customer credit capacity is constrained.
What is True Sale Financing?
True Sale is the recognition that all risks and rewards associated with an asset are transferred to another party, in return for a sum of money. In this transaction, the “Seller” sells an asset (AR) for a cash amount to a Funder where the cash value is generally less than the face value of the asset. The Funder purchasing that AR, however, then owns the asset outright, and has no recourse to you (the Seller) once they’ve purchased it. They now hold the risk of the asset and whomever owes the money under the AR itself (the “Debtor”).
True sale financing allows for increased access to capital, improved cash flow (through access to cash from the sale of assets), and reduced risk (allows for sale of assets that are no longer needed).
The LiquidX Approach and Solution
LiquidX’s multi-funder platform enables you to deepen your pool of investors, enabling access to over 75 different funders within our network. Here, the ability to sell down invoices to multiple investors increases the options available to both banks and customers, allowing for investors to target specific criteria or industries with difficult tenders or credit profiles. Subsequently, banks are able to improve funder risk management and make space for more deals. Customers can also cast a wider net among corporates while knowing they have access to a deeper pool of liquidity to support them.
LiquidX’s LiquidX’s digitization technology Trade’s single comprehensive interface is built to originate and distribute AR transactions. This linear ecosystem enables banks and financial institutions to sell an AR/AP platform to their corporate customers to either build their own system, white label, or co-sell with another platform.
Corporates leverage LiquidX’s digitization technology Trade to manage cash flow and liquidity across working capital solutions, simultaneously allowing for adjustments during the trade process. The platform includes tools to onboard counterparties and gather and track all documentation, including KYC and legal agreements. LiquidX’s digitization technology Trade gives corporates and financial institutions scalable, global technology and legal infrastructure to service all of their working capital and trade finance needs.
LiquidX’s solutions are designed to help you do business better, enabling real-time digitization, reconciliation and risk monitoring for better visibility and automation, streamlined efficiency, heightened transparency, and the power of the market’s best-in-class digitization powering your scalability. To learn more about our industry-leading, end-to-end digitization using the most advanced tech available today, request a demo or contact us directly.
