Years ago people had to visit a bank branch to carry out basic financial transactions like sending, withdrawing, or saving money. Today we carry our banks in our pockets and easily make these transactions from money apps or bank apps on our smartphones. This is a sign of a new era in the financial industry and the concept behind this is what is called fintech or financial technology (FinTech).
If you are a crypto trader or operate a cryptocurrency exchange we advise you to learn more about the specifics of the crypto liquidity aggregator and leverage WL Global’s crypto liquidity aggregator to filter out your perfect liquidity to benefit your business.
In this publication, we will explain what fintech is, what liquidity is, and its importance in business. We will unravel the challenges digital businesses face and the role of liquidity solutions in curbing or solving these challenges. By the end of this blog post, you will realize that liquidity solutions are essential for the success and sustainability of digital businesses in the financial technology era. Enjoy your read.
What is Financial Technology?
Financial technology is the integration of technology into financial services companies’ offerings for a personalized user experience to improve how customers use their services. This integration is carried out by companies that have decided to leverage technology to conduct basic functions provided by financial services.
Fintech, a portmanteau of the words financial and technology allows its users to store, send, save, borrow, or invest money digitally eliminating the necessity of visiting the physical offices of the financial institution.
Most fintechs were launched in the early 2000s however, they came into limelight from the year 2010. Fintechs gives its users insights into their finances and helps them easily manage their finances anytime, anywhere. They include and are not limited to banks, growth companies, start-ups, cross-sector firms, and non-financial institutions. Popular fintech includes peer-to-peer (P2P) payment services like PayPal, and Venmo and cryptocurrency trading apps like Binance and Coinbase.
Explaining Liquidity and its Importance in Business
Liquidity describes how quickly an asset can be bought or sold in the market without negatively impacting its value. The degree of liquidity determines how quickly the asset can be sold or bought at the current market value. Two ways to measure liquidity are market liquidity and accounting or financial liquidity.
Market liquidity measures how quickly an asset can be sold without impacting its price while accounting liquidity measures an individual or company’s ability to meet financial obligations with the liquid assets available.
Liquidity is essential for businesses, if markets are illiquid there is difficulty in selling or converting assets into cash. For example, a collection of rare books appraised at $100,000 owned by an individual could be illiquid if there is no market or buyers for it. People might not be willing to pay the appraised value and the owner might need to hire auction houses to attract interested parties and potential buyers thereby incurring costs and taking time to convert the rare books to cash.
Liquid assets are rapidly sold for their intrinsic value with minimal costs and companies need to hold enough liquid assets to ease basic obligations like payroll, bills, or debts. Cash is the most liquid asset and when a business faces liquidity challenges it could lead to bankruptcy.
The Challenges of Digital Business
There is an ongoing wave of digital transformation in today’s business environment. Technologies like the Internet of Things (IoT), social media, mobile applications, big data analytics, and cloud computing are at the forefront of this digital innovation. We are experiencing what has been called the fourth industry revolution, this is a disruptive moment and businesses have to survive and then strive to thrive yet David Rogers, a professor at Columbia University and author of The Digital Transformation Roadmap reports 70% failure of digital transformation.
An in-depth analysis of why businesses are failing reveals that businesses are facing more organizational challenges rather than the seemingly technological problems enterprises think they are having. From this analysis, we realize there are certain challenges digital businesses must overcome to thrive in this digital transformation season.
In this section, we will analyze three (3) major challenges of digital businesses.
- Volatility and uncertainty
Digital businesses are vulnerable to different uncertainties because of their dynamic nature. Let’s have a brief look at market fluctuations, economic instability, and regulatory changes.
- Market fluctuations: This can be caused by technological advances, customer preferences, and competitive dynamics.
- Economic instability: Challenges could result from inflations and geopolitical events and this could lead to changes in price and low demand.
- Regulatory changes: Digital businesses spend a lot of resources on compliance costs which is often an additional burden for digital businesses.
- Cash flow management:
Fluctuations in demand lead to uneven cash flow, unforeseen costs like legal disputes, and technological upgrade could strain cash reserves and disrupt operations. When customers delay payment it could also negatively impact cash flow and hinder business growth.
- Scaling and growth
Digital businesses strive to scale and grow yet expansion often incur expenses due to personnel, infrastructure, and marketing. Scaling could result in a shortage of capital because businesses need substantial investments in equipment, inventory, and other assets.
The Role of Liquidity Solutions
After the previous analysis of the challenges digital businesses face, let’s examine the role of liquidity solutions focusing on three key areas:
- Working capital financial
Working capital refers to the difference between a company’s current assests and its liabilities. These assets are the funds available to sort day-to-day operational expenses. When there is a shortage of working capital liquidity solutions can be sought for.
- Overdrafts: This flexible financing option allows a business to withdraw extra funds from its bank account than what it has. It helps to cover temporary cash flow shortages.
- Lines of credit: This provides pre-approved funds a business can easily access when required. This credit facility lets businesses take funds and repay them later.
- Invoice factoring: A factoring company can purchase outstanding invoices from a business at a discount and provide immediate cash flow to accelerate the business’s cash cycle.
- Purchase order financing: This is accessible by businesses that have received purchase orders from well-known customers. This financing allows businesses to get funds for future sales before the goods or services are delivered.
- Cash flow management
Optimizing cash flow helps businesses improve their financial performance thereby curbing financial distress. Efficient cash flow management is vital to maintain liquidity. Here are three ways to improve cash flow.
- Payment automation: Businesses that automate payment processes reduce the risk of late payments resulting in free-flowing operations, and improving cash flow visibility and control.
- Early payment discounts: This incentive is a proven means to make customers make payments early, improving the business cash flow.
- Supply chain finance: Businesses can improve their cash flow position by optimizing the payment terms with suppliers. A supply chain finance program will help businesses get a favorable payment term while benefitting from rebates or discounts.
- Risk management
Liquidity risk can arise from volatility and unexpected events. Let’s talk about three ways businesses can protect their financial stability.
- Hedging strategies: Hedging involves the use of financial instruments to offset the risk of adverse price fluctuations.
- Insurance: Insurance products provide financial protection in the event of unexpected losses. Types of insurance businesses can consider include and are not limited to liability insurance and property insurance.
- Treasury management tools: Businesses can leverage advanced treasury management tools to monitor and manage their liquidity position. This will help them identify potential risks and implement effective risk management strategies.
Final Thoughts
Digital businesses face several challenges that can impact their success, this publication has helped you to understand these challenges and with the knowledge you have, you’ll be able to address them successfully. Remember, liquidity solutions are a tested and trusted way to help your business improve its resilience and stay ahead of the competition by seizing market opportunities.