One of the most popular solutions is, of course, credit. In the event of problems with financial liquidity, the formation of irregular, unpredictable payment gridlocks, an overdraft facility may be a convenient option. It gives the opportunity to generate a negative account balance up to the limit granted to the company by the bank.
Credit – preferably on an overdraft
The advantage of this loan is, among others no repayment schedule. Each payment to the account automatically repays the loan or part of it and allows you to re-use the available limit.
A big plus is also that banks usually charge interest only on the amount actually used, not the limit granted. An overdraft facility is usually granted for 12 months. However, most banks offer the option of renewing the loan after this deadline without having to repay the full amount at the end of the loan period.
Of course, an overdraft facility requires an account at the crediting bank. So, if you choose an offer from an institution other than the one currently running your account, you’ll need to transfer it. With this move, however, it is worth pausing until we receive a credit decision together with the loan terms for our company. The procedure should not take long, some banks ensure that they are able to assess creditworthiness even in 1 day.
Banks also boast of being able to offer companies a lot of money, even over USD 1 million, as part of an overdraft facility. In practice, however, the loan value will depend on the company’s seniority, financial condition and collateral offered. Without tangible collateral, it is usually not more than 20-30% of the company’s revenues for the last year.
Factoring – quick financing
Factoring allows quick access to funds frozen in invoices with deferred payment dates. So it is not a product for a company that is suddenly surprised by problems with liquidity, but rather for a company in which the business model is to offer the so-called trade credits. There are many such companies on our market, but few still use factoring. According to the data of the Polish Factors Association, in 2013 this form of financing was chosen by less than 5.5 thousand. companies. However, the interest in factoring is clearly growing, as the turnover of factoring companies reached USD 131 billion last year and was 16% higher than a year ago.
The benefits of cooperation with a factoring company are not only related to the fact that it will transfer the receivables of its contractors to the company’s account even within 1 day (maximum a few days) from submitting the invoice. Before signing the contract, it will also scan individual recipients in terms of their solvency, and during cooperation will maintain accounts of debtors, monitor repayment of liabilities, and in the absence of payments on time – carry out activities aimed at recovery of receivables.
Who will bear the financial consequences, but if one of the contractors turns out to be insolvent? It depends on the type of factoring contract. In the case of full factoring, the factoring company assumes the risk of contractor’s insolvency, in the case of incomplete factoring, it remains with the entrepreneur using this service. Incomplete factoring is the option chosen more often in Poland because it is simply cheaper.
How much does factoring cost? Unfortunately, this type of financing often turns out to be even more expensive than credit. The factor charges a commission, usually around 2-4% of the gross value of invoices covered by the contract. The cost is also the interest in the financing granted, payable in arrears (more beneficial solution for the entrepreneur) or in advance.
Specific values are negotiated individually and depend on the value of the invoices transferred to the factoring company. The minimum and maximum limits are specified in the contract. You should definitely pay more attention to their issues. Setting too low a limit may prove insufficient to meet the needs of the company, while too high will result in generating unnecessary costs.
Debt collection – not guaranteed repayment date
We can use factoring only if we have a portfolio of customers who pay invoices on time while having access to funds before the payment date. However, what if we did not use this option and we are ready to wait for the receivables, which, however, do not reach the agreed deadline? The problem in the form of unregulated, overdue payments concerns many companies. It is possible that you will have to turn to debt collection companies for help.
However, it is difficult to consider debt collection as a sure way to improve financial liquidity, as there is no guarantee as to the date on which unpaid debts will reach the company’s account. Sometimes it is enough to contact the debt collector and the receivables are settled quickly, in the most difficult cases it may be necessary to go to court, wait for his judgment and then for bailiff enforcement.
The services of debt collection companies are also not the cheapest. The remuneration depends primarily on the period of limitation of payments, as well as the scope of activities of the debt collector and ranges from a few to even 30 percent. receivables.