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CIARAN RYAN: If you’re a mid-sized company, or what is more properly called a mid-corporate, you’ll probably be familiar with the repeating problem of funding working capital and trade finance.
Businesses have to weave their way through all sorts of external shocks – from shipping disruptions caused by the [Iran] war in the Strait of Hormuz [to] changing trade tariffs and other geopolitical shifts.
So working capital is not simply a finance function; it defines how resilient and competitive you are as a business.
To help us understand this, we are joined now by Ovi Sicwetsha, head of transactional banking for the mid-corporate market at Nedbank Business and Commercial Banking.
Hi Ovi, good to talk to you. It seems that the threats to the mid-corporate market are ramping up rather than cooling down. Explain the role of working capital in this particular market segment, and how important it is to business success or failure.
OVIZIKHUNGO SICWETSHA: Thank you for having me and I appreciate your time.
Let’s take a step back on this phenomenon called working capital … I like to frame it as ‘trade and working capital’ because it really talks to how our businesses are transacting through their cycles, their business cycles, and how we are funding the gaps between those cycles.
What we’ve observed over the period is that there are a couple of things that we can unpack here.
One is the issues that we see, the recent issue that we see across the Middle East [that has] had an impact on many aspects of our businesses in South Africa and across the continent largely – and maybe globally, if you like – where there have been a lot of disruptions in the cycles, from a buying perspective to a selling perspective on how the goods are shipped from wherever they are brought to their destinations.
If you take a step back, you’ll notice that there have also been disruptions around the trade issues that emanated from the United States, which caused a lot of disruptions, again, of supply chains globally.
And if you cast your net wider, there was the Russia-Ukraine situation which, if you look at the cumulative effect on supply chains, caused a lot of disruptions.
Now, as South Africa and as a developing world, these have had serious implications – from the sourcing of goods to the selling of goods, to logistics, moving goods around, and moving inputs into clients’ environments.
All of this has had a serious impact in the business cycles.
I’m framing it as ‘business cycles’ because these things are starting as business cycles, which then have an impact on how businesses are funding and their operations – how long it takes them to get their inputs, convert them into sellable products, and then sell them and collect on that.
All of these have had an impact – not only on their business operations but on their finances as well.
CIARAN RYAN: Ovi, in the businesses that you count among your clients, we’ve mentioned geopolitical risks and trade disruptions. They do seem to be on the increase. Is this the message that you’re getting from your clients?
OVIZIKHUNGO SICWETSHA: Yes. Largely what you see is that clients are now not running out of markets or places to sell their goods, but the inputs and getting those goods ready are being delayed. And getting those goods to their customers is also being delayed. So you have a lot of disruptions in that sense.
What you are also noticing is that, because of that, it has created a lot of strain on their cash cycles.
It starts as ‘I’m unable to get my inputs in’ to ‘How long do I take to convert those inputs into sellable products?’
And then into ‘How long does that cash come back into the business?’, which then disrupts the way clients manage cash flow and liquidity across the business. That effect has had those impacts on these businesses.
The mid-corp – or what we call the mid-market, being what we call the engine of the economy in SA – has been disrupted heavily by these delays, logistics, changing supplies and all those elements.
CIARAN RYAN: Let’s bring this a little bit closer to home. We’ve spoken about external shocks and geopolitical risks and the impact they have on liquidity and growth. At home our rail networks are improving, sure, but they are nowhere near where they need to be. The same goes for our ports.
When you talk to your clients, are these some of the issues that they are mentioning as something that is maybe throttling their growth, or is certainly a constraint on their ability to grow?
OVIZIKHUNGO SICWETSHA: Yes, certainly those. You would have seen a couple of months ago, we had big issues with the port in Durban – goods getting out of the port and all of that.
The impact that has had on some of our clients is that those goods sitting in the harbour are delayed getting to their stores or their warehouses.
The cost of moving those goods from the harbour to their warehouses, because of the issues on rail, has had a serious impact.
Embedded in that you then now need to extend the terms of collecting on those cash flows from your buyers, because you’ve delayed all the way through to receiving the goods on their side.
That has a serious impact on our clients. The resulting situation occurring here is in two ways.
One, they can’t collect on time, and two, the cost of doing business – from moving goods out of the harbour to delays, insurance and road transport – has increased materially. And all of those elements have added to their margins, which then means that all of that puts additional pressure on margins and creates further strain on the client’s financial position, which creates a financial situation on their side.
All of these are things that we are observing in the market.
The other element that we haven’t touched on is a shifting of their supplies because, with the tariffs and the geopolitical situation that we see in the Middle East, some of our clients have had to figure out where else they can source their goods.
The tariffs, as well as the war that is happening now in the Middle East, have had an impact.
Now clients have to figure out where to source goods, and the result is that you now have to find a new supplier, maybe in South America or somewhere else – and that has had added pressure to their cash flows.
Once [you have] a new supplier, you need to figure out how to build trust and all of those things, as you would have expected from your previous suppliers.
All of these elements are adding pressure on our clients, which really has been a bit of a strain in the mid-corporate environment.
CIARAN RYAN: All right. Let’s get down to some of the solutions.
When it comes to financing these businesses, there are different types of funding available. Take us through some of the options that you have.
OVIZIKHUNGO SICWETSHA: That’s a very important point, because traditionally working capital or ‘trade and working capital’ has been seen as your documentary trade where you just have these documents that you’re sending back and forth.
What has not come through is how these documents can be structured differently to help our clients.
I’ll give you a simple example. You have a client that has a new supplier. Let’s assume the supplier is in India. They’ve never dealt with this. When you have a new supplier what would typically happen is that the trust has not been built, so what the supplier would say is ‘Pay everything upfront, because we want to make sure as a supplier that we get our money before we produce’.
But as a buyer on this side you’re sitting with the risk that this supplier you’ve just engaged with, to whom you’ve paid all your money, but don’t know if the goods that you’re expecting will come in the right quality, at the right time, and whether those goods will arrive on time, in the right condition, and with the necessary protections in place while in transit.
What we then tend to do is to provide solutions that could mitigate that risk.
So instead of having cash that leaves you upfront, we then communicate with your supplier and their banker, and we create a relationship there where we can provide things like letters of credit, which will help you navigate that.
The real impact on your side – as a buyer who is sitting in South Africa – is, one your cash outflow doesn’t happen on day one. You now can get your goods on the sea and in some instances onto our shores before you actually pay on the other side.
But, two, it is very important that the quality specifications for those goods can be clearly set out in the letter of credit. To say ‘This is the quality, these are the things that you need to have as the goods are being shipped from the other side’.
All of these things, from a new-supplier perspective, give you a bit of comfort but also help the supplier on their side that, once the goods are shipped, they know there is a trusted banking arrangement in place and that, once the agreed conditions are met, payment will follow through the process. So it gives you a different perspective.
What we also can do is, let’s assume the goods then get into SA – there is a bit of a cash-flow situation, as I’ve indicated, [in] that the time it takes becomes quite tight – we can then go back into that LC [letter of credit] and refinance that LC differently, and get you to pay your supplier on time and wait for you to get your cash flows back into shape.
So these are some of the solutions that we’ve given to our clients. If you take another step at this differently, you will look at a client who wants to make sure that their supply is kind of ‘consolidated’.
They would provide what we call ‘supplier financing’ through their suppliers, meaning that where they would have waited to pay their suppliers in 30 or 60 days, we can actually settle their suppliers on time, and extend payment terms to our client while settling the supplier on time.
We understand them. We know them.
What it does for the client is take away the pressure of having to pay upfront on day one before the goods are shipped.
We give them a solution that is off balance sheet that works for them. But importantly, what we should not miss here is that these are all based on how you interact with the client. How do you understand their cash flows? How do you understand their business cycles – because, before everything else happens, you have to understand your client’s business cycles. Then you provide solutions that fit into those cycles.
So that’s what we’ve observed in the market, and that’s what we’ve been trying to do with our clients to help them navigate these uncertain periods, as you say today.
CIARAN RYAN: Okay, finally Nedbank Mid-Corporate has stamped its mark in this particular segment of the market. How do you do things differently? And any business leaders who are listening to this, how can you help them?
OVIZIKHUNGO SICWETSHA: What I would say here, Ciaran, is firstly what we have done at Nedbank is identify a real gap in the market.
Mid-corporate businesses are all around us, but they are often underserved or not fully understood despite the role they play in the economy. I think about 60% or so of our GDP comes out of this segment.
What you find is these are family-run businesses, sometimes family around businesses or run by entrepreneurs who started the businesses.
What they need is someone who is going to sit down with them, understand their vision first. What is this business trying to achieve, and how do we help fund and support that vision? Then figure out how to find that vision.
That’s what we do.
Over and above that, understand the day-to-day funding requirements, transacting requirements to help the business navigate as it is growing. Nedbank has been able to identify that.
What we’ve done internally is bring the right capabilities together around this segment. We have a team that I look after, the transactional banking team. Jason [Hamilton] is my colleague who looks after leveraged finance. We have our credit, our own credit committee. We have our coverage bankers dedicated to this segment – all of this. And we have a dedicated onboarding team.
All of this is built around speed of response and speed of execution.
How do you make sure that you get whatever solution the client needs as quickly as possible, and make sure that they get these things when they need them?
So it’s sitting around the table with all these SMEs, trying to ensure that we fully appreciate what the client is trying to do, and finding the right solutions for them.
I’ll give you a typical example.
When I speak to some of our clients, they don’t care much whether the payment they want to make is a payment that is internal in South Africa or cross-border. All they want to do is to make a payment. So we sit down with them, we understand their payment cycles, we find the right solution and make sure the relevant capabilities are in place to support that payment; we make sure that if it’s a cross-border payment we have all the relevant solutions to help them.
Whether or not it’s a Reserve Bank requirement that we must comply with, we ensure that we provide the right advice. Whether it’s FX [foreign exchange], or they want to hedge that FX, we make sure that all of those things are in place.
If it’s a long-term funding situation, we have a team that is looking for that, and we make sure that we are sitting with them, understanding their cycles, understanding what they are trying to do, putting forward solutions that are aligned to what the client is trying to achieve.
And importantly we’re speaking to the business owners because these are the business owners with the vision for where they want to take the business, and we need to sit and back that vision, understand it, and fund it accordingly.
CIARAN RYAN: Okay. Well, we’re going to leave it there. Thank you very much for that, Ovi.
OVIZIKHUNGO SICWETSHA: Thank you so much for having me.
Brought to you by Nedbank Mid-Corporate.
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