Virtual Cards Revolutionize Working Capital for North American Middle Market Businesses

A recent study, jointly conducted by a leading payments intelligence firm and Visa, surveyed 276 chief financial officers (CFOs) and treasurers from across North America. The study, part of a larger global index encompassing 1,297 executives across 23 countries, focused on the working capital challenges and solutions employed by middle market companies – those with annual revenues between $50 million and $1 billion. The findings revealed a significant trend: the increasing adoption of virtual cards as a crucial tool for enhancing working capital efficiency.

The research highlighted the acute need for improved working capital management, especially among middle-market companies. Many of these businesses faced the challenge of delaying production until sufficient revenue was secured, impacting supply chain utilization and overall efficiency. This underscored the urgent demand for digital solutions capable of optimizing working capital flows. The study's findings indicated a strong preference for digital-first solutions requiring minimal manual intervention, reflecting the current trend towards automation and integration in business operations.

The data revealed that a significant majority – 80% – of middle market growth corporates utilize working capital solutions. However, smaller companies within this segment faced significant hurdles, primarily due to limited access to funding, especially given the prevailing high-interest rate environment. This lack of access created a ripple effect, impacting payroll, supplier payments, and ultimately freezing supply chains. The study emphasized the need for comprehensive, holistic solutions that integrate receivables and payables functions seamlessly, avoiding the complexities of managing multiple disparate systems.

North America boasts approximately 200,000 middle market growth corporates, supported by a robust and diversified external financing ecosystem. However, a closer examination revealed surprising results. Companies with revenues between $50 million and $250 million, particularly those in traditionally less-technologically advanced sectors like agriculture, showed the most significant improvements in working capital efficiency. This was noteworthy considering the inherent challenges of the agricultural sector, where production cycles can extend for 8 to 12 months, requiring substantial upfront investment.

"For those 8 to 12 months," explained a key industry expert involved in the study, "120% of my investment is actually working capital... because if I don't have that, then I cannot do anything." This statement underlines the critical need for diverse funding options beyond traditional bank loans, especially for businesses with extended production cycles.

The Rise of Virtual Cards

The study revealed a dramatic shift in working capital strategies. Middle market firms in North America, including those in the agricultural sector, increased their usage of virtual cards by a remarkable 54%, significantly reducing reliance on more traditional methods. This trend reflects the growing recognition of virtual cards not just as a payment mechanism, but as a potent tool for working capital management. The expert interviewed emphasized this shift, stating, "I've been on the road telling everybody to forget virtual cards as a payment rail—they are actually a working capital rail." Independent research indicates that businesses that accept payments via commercial cards realize double the benefits compared to their costs. These advantages are unparalleled in many alternative payment systems.

Despite the clear benefits, a significant educational gap remains. Underperforming middle-market firms often fail to leverage the full potential of virtual cards. The study highlights the need for greater awareness of these advantages. Many companies lack the internal expertise to optimize their payables and receivables processes efficiently. Virtual cards, therefore, offer a significant value proposition by providing integrated solutions that streamline both aspects. This integrated approach leads to improvements in Days Payable Outstanding (DPO) and Days Sales Outstanding (DSO), while also bolstering fraud mitigation efforts.

The multiplier effect of virtual cards is striking. A supplier waiting 30 days for payment, with a $1 million credit limit, can typically sell $12 million annually to their client. However, accelerating payments by just 15 days through virtual cards can effectively double potential revenue with the same credit limit and client.

The data underscores the success of this approach: top-performing middle market companies using virtual cards experienced significantly shorter cash conversion cycles (38% reduction), reduced days inventory outstanding (32% reduction), and realized $181,000 in savings on borrowing costs. This demonstrates the substantial financial benefits associated with adopting virtual cards compared to their lower-performing counterparts.

Looking ahead, the study indicates a cautious optimism among CFOs and treasurers. They recognize the potential of virtual cards and similar solutions while acknowledging the ongoing economic headwinds and tailwinds that could impact their businesses. The study concludes that virtual cards represent a pivotal shift in working capital management, empowering middle-market businesses to optimize their financial operations and achieve sustainable growth.

The detailed analysis provided a clear picture of the challenges faced by middle-market companies in managing their working capital. It further highlighted the significant potential for improvement through the adoption of virtual cards and other digital solutions that streamline payment processes and improve cash flow. The study underscores the importance of ongoing education and awareness to ensure that all businesses, regardless of size or sector, can benefit from these innovative tools. The widespread adoption of virtual cards will significantly contribute to improving the efficiency and financial health of North American middle-market companies.