How Businesses Leverage Working Capital Solutions to Drive Growth

In an evolving economic landscape, the ability to innovate in working capital management is crucial.

And with the news Tuesday (July 9) that the latest edition of the National Federation of Independent Business (NFIB) Small Business Optimism Index was, ultimately, not very optimistic, managing working capital more effectively and strategically is top of mind for businesses aiming to maintain stability and grow.

Responding to these challenges, new working capital products and financial services have emerged, offering more innovative and flexible solutions designed to help insulate businesses from ongoing economic fluctuations such as inflation, interest rate changes and even currency volatility.

These marketplace innovations include products such as virtual and commercial cards, supply chain finance, invoice finance and asset-based lending, among others. Such working capital solutions provide businesses with quicker access to funds, improved cash flow management and the ability to invest in growth opportunities without the burden of traditional debt.

Maximizing the efficiency of working capital has become a strategic priority for businesses, with innovations in working capital financing not only reshaping how businesses manage their cash flow but also fueling a new era of growth opportunities. Strategies such as optimizing inventory levels, extending payment terms with suppliers and accelerating receivables have been instrumental in improving both cash flow and operational efficiency for businesses.

Read more: Commercial Cards in Action: Businesses Gain Working Capital Flexibility

Unlocking Value With Better Working Capital Management

While observers expect the macroeconomic environment to remain relatively dynamic and unpredictable through the rest of 2024, top performers are leaning into controlling what’s controllable by transforming the cash-conversion culture across their organization and implementing advanced digital-analytics solutions.

“The tightening of monetary policy and inflationary pressures have suddenly made a lot of these corporates realize they need working capital for two reasons,” Chavi Jafa, head of commercial and money movement solutions, Asia Pacific, at Visa, told PYMNTS. “One, for short-term working capital to make sure that they don’t have any operational disturbances. And two, for strategic long-term investments into newer technologies and digital solutions.”

“In a lot of emerging economies, [we are seeing] a leapfrogging of technology and digital-first solutions, and it’s this corporate segment that tends to drive a lot of the growth in digital economization — they need that working capital to invest,” Jafa added.

The latest release of “The 2023-2024 Middle Market Growth Corporates Working Capital Index,” a PYMNTS Intelligence report commissioned by Visa, noted that middle-market firms with revenues between $50 million to $1 billion annually perform most efficiently when they tap into external financing for planned growth initiatives and to cover expected cash flow gaps.

The data comes from a survey of nearly 900 chief financial officers and treasurers operating in 23 countries and five sectors, including agriculture, healthcare, fleet and mobility, marketplaces and commercial travel.

Among the key findings of the index, users of working capital — strategically and tactically — outperformed those firms that did not use working capital. Two-thirds of Growth Corporate CFOs who accessed external working capital in the last 12 months did so for strategic purposes: to cover planned cash flow gaps related to predictable business cycles or to invest in business growth, including funding systems upgrades, buying inventory at discounted prices and making investments.

And the intent to use working capital over the near term is increasingly universal as businesses recognize its strategic benefits. The data showed that more than 9 in 10 (92%) of the CFOs surveyed planned to access external working capital in the next 12 months.

Read more: Working Capital Index Finds Central Europe and EMEA Ripe for Growth

PYMNTS Intelligence reveals that 37% of growth corporates have used working capital solutions for strategic growth initiatives, 30% have used it as a tactic for emergencies, and 29% have used working capital as a way to maintain strategic cash flow continuity.

When it comes down to the actual working capital solutions being deployed, over a third (36%) of businesses used working capital loans. Just under 1 in 5 (19%) used bank lines of credit. Crucially, a majority of firms (62%) generating revenue between $750 million and $1 billion used virtual card solutions as a growth strategy. The use of virtual cards as a working capital solution is projected to triple through the next year, according to the PYMNTS Intelligence data.

That’s because, as David Bork, head of AR solutions at Boost Payment Solutions, told PYMNTS in an earlier discussion, “working capital is very important in shifting and uncertain economic times … and businesses are increasingly looking at opportunities to utilize commercial cards in a meaningful way.”

Beyond the strategic nature of efficient working capital management, top performers have more suppliers integrated into their payment systems, reducing delays and errors. They are also more likely to pay their suppliers earlier, which leads to discounts and improved buyer-supplier relationships.

Still, one of the remaining hurdles holding back broader adoption of alternative working capital solutions is the lack of awareness among businesses, with many unaware of alternative solutions such as virtual cards.

Bridging this awareness gap will require a concerted effort from industry stakeholders to educate businesses about the diverse array of working capital solutions available to them, as well as knowledge sharing around how efficient working capital management increases cash flow which can in turn increase the growth opportunities firms have on hand.