Last year, 58% of growth corporates in the Central Europe, Middle East, and Africa (CEMEA) region utilised working capital solutions. However, the region's usage rate falls short in comparison to others, suggesting that firms in the region might not be capitalising on external financing solutions available in the market to bolster short-term operational resilience and drive long-term growth.

“Fortunately, this is slated to change, as Growth Corporates in the CEMEA region plan to increase their use of external working capital solutions: 95% plan on accessing financing in 2024, a 64% increase from 2023.”

These are some key findings in the “2023-2024 Growth Corporates Working Capital Index: CEMEA Edition,” a Visa report done in collaboration with PYMNTS Intelligence.

Insights presented in the report are based on a survey conducted from March 9, 2023, to June 12, 2023, involving 159 corporate CFOs or treasurers at companies that Visa calls “Growth Corporates” or middle market companies that generate between US $50 million and $1 billion in annual revenue.

The report delves into the various working capital solutions at the disposal of growth corporates in the CEMEA region for securing short-term cash or credit. It also explores the preferred utilisation of these funds and the resultant impact on operational efficiency and business performance. Here are the main takeaways from the report:

Accessing working capital solutions enhanced business metrics and buyer-supplier relationships

According to the report, “Seventy-seven percent of Growth Corporates in CEMEA that used working capital solutions in the last year reported improved business metrics and buyer–supplier relationships — the highest rate among all the regions in this study, which include Europe, North America, and the APAC and LAC regions.”

A vast majority (90%) of the CEMEA growth corporates surveyed highlighted access to financing as a crucial factor for securing favourable cost of capital for new business ventures. Nevertheless, despite the apparent benefits associated with leveraging working capital, CEMEA growth corporates are the least likely among the regions studied in harnessing these benefits, with 42% opting out of using working capital entirely.

The low utilization rate of working capital might be attributed to high costs, which often render many companies in the CEMEA region unable to access such funding.

Notably, 15% percent of CEMEA growth corporates “Could not access any working capital, which was the highest rate among all the regions studied — beating out LAC at 4% and nearly three times higher than Europe’s 5.1%”, the Visa report noted.

Working capital loans and bank line of credit preferred working capital solutions

The working capital solutions comprise eight financing options that growth corporates in the CEMEA region use to access external capital. These options encompass working capital loan, bank line of credit, third-party revolving credit facility, corporate/virtual credit card, invoice financing and factoring, overdraft from corporate bank account, letter of credit and bank guarantee, and draw against unused corporate credit line.

Among the working capital solutions utilised by CEMEA growth corporates last year, working capital loans and bank lines of credit were highly preferred, “With 25% of Growth Corporates in the region turning to this working capital solution. Even as a popular working capital solution, the 25% usage rate is relatively low, which opens opportunities to expand working capital options in the region”, the report stated.

When considering all users of working capital loans in the region, the study discovered that 39% of agriculture growth corporates and 35% of healthcare growth firms accessed this form of financing in the past year.

In comparison to other sectors examined, marketplaces demonstrated above-average utilisation rates of working capital loans, with 31% of marketplace growth corporations using them the most in the CEMEA region last year.

Furthermore, healthcare middle market companies in the region also exhibited notable preferences for invoice factoring solutions and unused corporate credit lines as their primary options in the previous year. This observation suggests that healthcare CFOs in the region may prioritise working capital solutions featuring higher credit limits, the report added.

Additionally, what is encouraging to note is that CEMEA growth corporates have recognized the potential of virtual cards even more than the rest of the world.

Source: Visa and PYMNTS Intelligence 2023–2024 Growth Corporates Working Capital Index: CEMEA Edition, April 2024

The report goes on to say that “Across all five regions and 23 countries we studied, virtual card adoption among Growth Corporates is slated to triple during 2024 and 2025. In CEMEA, projected adoption will grow even more—more than fivefold. Around one-third of CEMEA Growth Corporates plan to use virtual cards in the upcoming year.”

Agriculture and healthcare growth corporates strategically employed external financing

As outlined in the report, “Seven in 10 CEMEA Growth Corporates in agriculture and healthcare used external financing strategically to support expected cash flow gaps and shortfalls in finances.”

Those growth firms that chose not to use working capital commonly cited the elevated cost of capital and lengthy decision cycles as hindrances to obtaining external financing, in accordance with the report’s analysis.

In contrast, the study highlights that the fleet and mobility sectors, along with commercial travel, displayed the least strategic approaches among growth corporations in the CEMEA region. These sectors, heavily dependent on travel, are particularly vulnerable to external factors such as extreme weather events or global crises, making strategic planning more complex.

Strategic use of external funding propelled CEMEA top performers

In the CEMEA region, 75% of top-performing growth corporations strategically opted for external financing to fund planned initiatives and business expansion, compared to a mere 19% of middle-performers pursuing financing for similar purposes, the report noted.

The report further added that “Regions with a high percentage of top-performing companies using external working capital solutions for strategic purposes tended to earn higher scores in the WCI, as those use cases correlate with high efficiency. The opposite is also true, as regions with many companies using these solutions for tactical reasons — or not using them at all — tend to have suboptimal operations and score lower in the WCI.”

Moreover, the report mentioned that among the lowest-scoring growth companies in the CEMEA region, working capital was predominantly utilised in a tactical manner, primarily to manage crises and unforeseen challenges, rather than as part of a cohesive strategy. Financing for emergencies was used by 24% of bottom performers, while 14% did so for unexpected growth opportunities.

Nearly  a quarter of these bottom performers reported being unable to access any external working capital solutions last year, a contrast with the situation experienced by their high-performing counterparts. This disparity, according to the report, suggests that lack of access in the CEMEA region, “Whether due to cost or other factors, disproportionately impacts bottom-performing Growth Corporates.”

In conclusion, the geography and diversity of the CEMEA region are notable attributes, featuring a mix of advanced, emerging, and developing nations. While access and the high cost of capital have kept external financing out of reach for many growth firms in the region, there are positive signs, as indicated by the report, that are “Exhibiting the most notable shifts toward growth-driven use of external financing solutions for 2024.”

In light of this development, understanding the distinct external financing needs and capabilities of middle market companies or growth corporates in the CEMEA region will enable finance and treasury professionals to deploy suitable working capital solutions, thereby improving  operational efficiency, enhancing liquidity, and fostering business expansion.