Virtual Cards Drive Working Capital Efficiency for North American Growth Corporates

In the second annual edition of the “Middle Market Growth Corporates Working Capital Index,” PYMNTS Intelligence and Visa collaborated to mine the opinions of 276 chief financial officers (CFOs) and treasurers doing business across North America.

And as Abhishek, global head of B2B Acceptance at Visa, told Karen Webster, these executives have always been aware of the advantages of optimizing working capital solutions. That awareness was acutely felt during the pandemic and is now part of the toolkit companies have to manage cash flow.

The North American sector of the global report — the index studied 1,297 CFOs and treasurers across eight industry segments, five global regions and 23 countries — found the need for better working capital management was most keenly felt by middle market companies with revenues spanning $50 million to $1 billion. Many of them wound up waiting for revenue to arrive so that they could get production of goods going and to improve the utilization of their supply chains. The most pressing need was the need for digital solutions that can optimize working capital flows.

“It’s still a strong need,” Abhishek said, adding that in the current digital age of automation and integration, digital-first solutions are valued because they require the least amount of manual intervention.

The use of working capital solutions is widespread, as the data shows that 8 in 10 middle market growth corporates (with $50 million to $1 billion in annual revenues) have used such products.

But for the smaller middle market companies — already challenged by limited avenues of funding, in contrast to their larger brethren — the current (still high) interest rate environment means that they still do not have access to critical funding. And if they do not have that funding in place, they don’t make payroll. They’re unable to make their supplier payments … and supply chains are frozen in their tracks.

The solutions they want are holistic, Abhishek said. “They want to look at the end-to-end ecosystem,” he said, adding that treasurers want to have digital offerings in place that work across receivables and payables functions, without having to juggle multiple systems.

North America is home to 200,000 middle market growth corporates and a highly robust and diversified external financing ecosystem.

But drill down a bit, and it’s the $50 million to $250 million players in that ostensibly most analog sectors, the agriculture sector, which are showing the greatest gains in working capital efficiency.

That’s despite the fact that the ag sector is tied to an extremely long cycle — where a farmer plants the seeds, or raises the cattle, and after months of labor, sweat, deployment of heavy equipment and hope that the weather holds out … only then are the yields evident (or not).

“For those 8 to 12 months,” Abhishek said, “120% of my investment is actually working capital … because if I don’t have that, then I cannot do anything.” For the middle market companies that have traditionally only been able to go to banks for working capital, having other options at hand has become critical.

Value of Virtual Cards

To that end, the data compiled by PYMNTS and Visa shows that middle market firms overall in North America — including ag firms — increased their use of virtual cards by 54%, at the expense of other, more traditional working capital options.  Visa, of course, has stood at the forefront of that movement — and Abhishek has been part of that.

“I’ve been on the road telling everybody to forget virtual cards as a payment rail — they are actually a working capital rail,” he said. Visa’s own research shows that when a corporate, even the large ones, start accepting payments on commercial cards, they receive twice the benefits that the cost they pay for those same cards.

“These are benefits that are not available across many of the alternative rails,” he said.

But there remains a need for education, he told Webster, where bottom-performing middle market firms still are missing out on the advantages that virtual cards can afford them.

Part of the value proposition to be illustrated lies with the fact that most corporates don’t have the expertise in house to streamline their payables and receivables — and in effect are looking for “integrated solutions that bring this all together in a box.” Virtual cards offer that end-to-end ecosystem, Abhishek said, which drives DPO and DSO efficiencies, alongside strong fraud mitigation.

By way of illustration of the multiplier effect of these benefits: If a supplier waits 30 days to receive their money, and the maximum credit they can extend to their buyer is $1 million, the maximum they can sell to their client is $12 million worth of revenue (annualized). But if they accelerate their payments by 15 days, with the use of virtual cards, they can effectively double their potential revenue with the same credit limit — and with the same buyer.

The proof is in the pudding, as they say: Visa and PYMNTS Intelligence have found that the middle market top performers have seen 38% shorter cash conversion cycles, 32% shorter days inventory outstanding — and $181,000 in borrowing costs that they’ve been able to realize by taking advantage of the relatively lower interest rates tied to cards than their lower performing peers.

Looking ahead, he said, of the middle market companies’ CFOs and treasurers and the desire for working capital, “they are optimistic — but they are realistic in terms of the headwinds and the tailwinds that may be coming their way.”