On My Mind

Culture of Innovation

Exploring alternative sources of funding

By Vikram Oza

Creating and developing a culture of innovation in an organization is of paramount importance for a finance leader. To stand out from the pack, one needs to nurture innovative ideas. And to achieve this, the finance leader should lead by example to show the team how to inculcate innovation in daily tasks.

In my opinion, there are two key areas in day-to-day working of the finance function that require an innovative approach. The first is raising finance and ensuring that liquidity is maintained at comfortable level throughout the organization. The second area of importance is to keep finance costs at a minimum while devising ways and means to continuously reduce them through various innovative techniques.

This is possible only if everybody in the team is involved. Set the goal and let your team come out with innovative ideas. Besides, encouraging brainstorming sessions within the team can bring many ideas to the fore. Implementing those ideas which are executable can result in what you had aimed for at the beginning of the exercise.

Let us take the first case of raising finance for an organization at a cheaper rate. One is for day-to-day funding of operations viz. working capital requirement; the other is funding for capital expenditure or capex, which is used to meet expansion needs.

For day-to-day funding, there’s normally a cash credit limit, which is known as CC limit in banking parlance. Here the rate of interest (ROI) is usually fixed and is non-negotiable in most of the cases. This presents a very good opportunity to experiment with alternative methods of funding while keeping ROI at a rate lower than what you normally pay for CC limits. You can go for a non-fund-based capital limit and get it converted into fund-based capital limit. Here you can get funds at a cheaper rate if you negotiate well. For example, you can open a Letter of Credit (LC) favoring your suppliers. You can prefer private banks over PSBs in this scenario as private banks generally offer better rates for opening of LCs, give more discount than the PSBs (the difference could be as large as 4-5% per annum, depending on the liquidity position off the economy), and have quicker disposal ability.

The second method of funding is to identify and explore Supply Chain Finance (SCF). Here funds can be raised through the customers without running the risk of balance sheet exposure. You can even pay your vendors at a highly competitive ROI without providing any security coverage.

The third method is to raise funds by issuing Commercial Papers or CPs as they are  called in banking parlance. This again is a very good route taken by better-rated companies for a short period of time. It can be again rolled over. By the year end, you may discover that your finance cost has drastically reduced without any compromise whatsoever on your liquidity. You can also upgrade your external rating (corporate credit rating) by employing such routes, which can again help in improving the company’s bottomline or net income through reduced interest outgo.

Similarly, you can go for Buyers’ Credit and Suppliers’ Credit to raise funds for your expansion needs. If you have natural hedge, External Commercial Borrowing or ECBs are dirt cheap if they are linked to EURIBOR or LIBOR or even the Japanese Yen. Of course, one will have to switch over to Secured Overnight Financing Rate or SOFR for a short period. This interest rate has traditionally been lower than the above linkages. There are different forms of raising such funds – taking credit insurance by your suppliers of machinery; or even by issuance of Corporate Guarantee by any of your financially strong associates. By following these methods, you can obviate the need for cumbersome documentation involved in such deals if you go for a Rupee Term Loan.

Therefore, to conclude, the more involved you get in the working of things and the more you involve your team in the decision-making process, you will invariably reap better returns and your efforts will be rewarded. This in turn will substantially improve your profitability, which can lead to betterment of your financial ratios. It may also result into better rating, both by banks and by external agencies.  Thus, it is imperative that you encourage and nurture the culture of innovation in your workplace. This will be a win-win situation for you, your team members, and your organization.


The author is Director Finance – Jindal Worldwide

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