The appropriate choice of financing terms is critical to having a good balance of payments and thus becomes something fundamental to the company. We know that we need to finance the company's assets, but do we finance current or non-current assets?
This is the first thing we have to consider. Since it is not the same to finance a vehicle or an industrial ship, than to finance the purchase of merchandise for the inventory.
The 4 basic points to take into account when choosing financing terms
- Working capital is absolutely fundamental to watch. This capital is part of the current assets of a company that is financed with resources (own or others) in the long term. Without this fund the company would be unbalanced in order to comply with its payment commitments and having difficulties to continue its normal operations. So the difference between the assets and the current liabilities of the company must be greater than zero.
- The non-current or fixed assets should be financed in the long term if they are of high amounts, since otherwise the high loan fees can lead to insolvency of the company if it is not able to generate sufficient resources to meet the amortization of credits.
- Long-term debt gives the company greater stability. For example a credit policy may not be renewed if the company's accounts deteriorate. In this sense, a long-term loan, gives more stability to the balance of the company, giving more time for the investments to bear fruit and begin to generate liquidity to be able to repay the debts.
- Short-term financing should be used to finance the business cycle of the company. Remember that the business cycle is the time that elapses since the company acquires its raw materials, transforms them into a final product, sells it and collects the sales revenue from the client. Short-term financing is therefore the best option to anticipate customer collections, for example to pay suppliers.
Short-term and long-term financing alternatives
In the short term, the most common financing is usually the advance of customer loans, discounting payments or requesting a credit policy.
In terms of long-term financing, personal loans are one of the most demanded products, and solvency of the company, in many cases linked to the creation of guarantee or guarantees, is fundamental for getting a concession.
However, if what you are going to finance is real estate, then the star product is a mortgage loan, where the good will be the guarantee of repayment.
Another alternative to acquire assets is via leasing, which involves the formalization of a long-term lease that allows the use of a movable or immovable property that has been acquired by the financial entity (leaser) under the express order of the applicant for the use of the (leasee) in exchange for payment of periodic installments that amortize the cost of the property plus its financial burden. One of the main reasons for using this financing formula is the tax advantages for the leasee. Since the fees paid are considered expenses, including interest, and they do not become part of the company's fixed assets unless the residual quota is generated to acquire title to the property.
Choosing timely financing is of the utmost importance, since a poor choice can mean that the resources generated by the company are not enough to meet its payment commitments, leading to financial trouble.