Short-term Funding Options To Drive Your Business (Part 11)

Know What You Need Before You Throw In A Request

Continued From:
Short-term Funding Options To Drive Your Business (Part 1)

7. Receivables/Bills Discounting
Most businesses inevitably end up extending credit to customers or being owed for one reason or the other. Invariably, this ties up operational capital and could constrain the business from activity and growth. A way out is to seek a receivables discounting facility whereby a bank can discount the receivables, if set criteria are met. Needless to say that the receivables must be verifiable and must be due from reputable parties. Of note here are supply invoices against major companies, already accepted for payment. Big companies have a payment period, say 60days. If you've supplied products which have been accepted as meeting specification and certified for payment, you may have funding difficulty waiting for the due date. If the bank is satisfied about the quality of the invoices, it can discount, releasing funds to you.

If the customer has executed a Bill if Exchange, an acknowledgement of indebtedness with a promise to pay at the maturity of the bill, you can negotiate the bill with your banker to get immediate value (i.e. the discounted value).

Another way you can unlock working capital tied up in receivables is by factoring, which applies particularly when the debts are proving difficult to collect. You can turn them over to a factoring agent (may not be a bank), who after due verifications, can pay you an agreed proportion of the value while proceeding to pursue recovery.

8. Inventory Refinancing
Your short-term cash constraint may be as a result of locking up a significant part of your working capital in inventory. Stockpiling might be a strategic action, but will be bad for the business if it is as a result of obsolescence, poor demand or some other problem with the stock. If the stock commands good value, you may consider seeking an inventory refinancing facility. The objective will be to get the bank to provide you a fair portion of the value tied up in the stock to free resources for driving the business. Of course no bank will put money down for this if it is not satisfied about the quality and marketability of the stock. If they are, they will determine how best to structure any facility they extend to you so as to ensure the liquidation of the facility from proceeds of the stock or to take some other security. Bottom line: inventory refinancing may in some circumstances be a viable approach to managing the funding pressure on your business.

10. Import Finance
If your business involves the importation of goods by means of letters of credit (LC), you may obtain funding support from your bank. When an LC is opened by your bank in favour of a supplier, money is not immediately released to the supplier. The bank literally guarantees to the supplier that he will receive payment once the stated conditions are met, principally the delivery of goods and the receipt of relevant shipping documents. The credit worthiness of the bank is effectively substituted for yours which the supply is obviously unwilling to rely on. To provide such guarantee, you ought to provide a cash collateral. An import finance facility means that the bank grants a facility to cover this funding. They may require a contribution from you, as a mark of commitment, with the balance funded by the bank. If they provide this against the shipping documents, it means you must liquidate the account before retrieving the shipping documents (forwarded directly to the bank) to clear your goods.

11. Duty Finance
This distinction is as to purpose, as otherwise this facility could be as an overdraft line or even a TOD. The purpose is to support payment of duties where there are goods to be cleared at the wharf, if you are an importer. A duty payment line, dedicated to duty payment, may be provided you by the bank or alternatively, ad hoc requests are made whenever there is a need to pay duty. You are more likely to get this facility if the bank has funded the import and has an interest in having the goods cleared and sold off to liquidate the account.

12. Bonds
Bonds, issued by key financial institutions, particularly banks, may be required of you when you engage in certain transactions. Common ones are tender/bid bonds (to commit you to a tender/bid), performance bond (commit to performance of a contract, especially after picking up a mobilisation), customs bond (to commit to duty payment after moving goods out of wharf) and excise bond. The bank gives an undertaking on your behalf. Banks can also provide guarantees and indemnities to third parities on your behalf.

13. Commercial Papers and Banker's Acceptances
These are instruments to raise short-term funds, which the bank can package for you if you have a name that can support them. For a BA, the bank adds it acceptance which further strengthens the instrument as it represents a guarantee, by the bank, that investors will be repaid at maturity. Both products are marketed to the investing public to raise funds for your use.

This list is not exhaustive but should provide you some insight into what is possible when you need short-term finance from banks. Your bank may also be in a position to work out something that fits your peculiar need if your requirement is unique. Borrowing can propel your business and enable you achieve bigger results, provided you borrow wisely.

Back To:
Short-term Funding Options To Drive Your Business (Part 1)

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