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Treasury management is the process of managing an organization’s financial resources in order to optimize cash flow, minimize financial risk and maximize investment returns. In the case of banks, treasury management involves managing their cash and liquidity position to ensure that it has sufficient funds to meet its financial obligations, such as paying depositors and making loans while also making a profit.
Why is Treasury Management Important for Banks?
There are several reasons banks need a solid treasury management approach…
Effective treasury management is an essential function for banks and ultimately determines its long-term financial stability.
Impact of Interest Rate Policy on Treasury Management
Interest rates play a significant role in treasury management as they impact a company’s cost of borrowing and the returns earned on its investments and this works in the same way for banks. As interest rates rise, financial institutions and indeed any business with debt finance are affected by higher borrowing costs. The main implications are;
Treasury management means managing interest rate risk closely to determine how movements may negatively impact a business’ or banks’ financial position. In a changing interest rate environment and with other economic instability, banks may have struggled just as other businesses have to manage their liquidity effectively and meet customer demand; this is evidenced by the recent collapse of Silicon Valley Bank (SVB) and Signature Bank in the U.S. and the subsequent failure of First Republic Bank on May 1st.
A Treasury Management Partnership for Today
In the current climate, with many businesses struggling to repay their loans amidst rising costs and a sales downturn, banks may be tightening their requirements for borrowers as they attempt to minimize their risk. A big factor for banks is the creditworthiness of the business itself. A business’ credit rating may drop during tough times and one that was a good candidate for further lending may become unappealing to traditional banks. Working alongside a factor on higher risk clients could prevent losing their business completely due to more stringent borrowing requirements. Furthermore, businesses have an increasingly complex set of needs currently and banks don’t always have the full range of financial solutions to offer them.
Working in partnership with Invoice factoring companies, banks can improve their treasury management while retaining a relationship and continuing to fund their clients. A factoring company can provide a new source of funding for the bank by purchasing accounts receivable (AR) from the bank’s customers. This can help the bank balance cash flow and liquidity by providing them with immediate cash for the AR they sell to the factoring company. The bank may then use the cash to fund operations or invest in other assets, while the factoring company generally takes on the risk of collecting the accounts receivable.
Alternative finance companies often offer other services such as working capital loans, supply chain finance and asset based lending which can be a good way for banks to get access to new revenue streams by offering their clients a comprehensive and integrated working capital solution.
A factor can also help banks to mitigate credit risk by providing credit analysis and monitoring services for their joint clients. Factoring companies often have lots of expertise in assessing the creditworthiness of a company’s customers and can help in evaluating the risk associated with lending to those customers. This can help banks make more informed decisions and reduce credit risk.
Overall, by partnering with a factoring company, banks can enhance their financial services offering, reduce their risk exposure and improve the bottom line.
Partnering with Sallyport to Better Serve Clients
If you’d like more information on how we work with our business banking partners to provide customized cash flow solutions and support them in conserving treasury management, reach out to our team today.
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