Factoring, fine trading, leasing, and debt collection are alternative financing solutions for SMEs. They ensure quick liquidity and save equity.
Many companies need help to obtain credit. One of the reasons for this is the high-security conditions due to the stricter regulations. Small and medium-sized companies are open to alternative financing solutions. Companies in the 2.5 to 50 million dollar sales class consider modular financing sensible. You believe that a mix of funding is a growth accelerator. It means entrepreneurs remain liquid and can act more flexibly in the market. Alternative financing solutions and how they work are in more detail below.
Factoring: Immediate Liquidity Through the Sale of Accounts Receivable
Factoring is on the rise. More and more small and medium-sized companies are relying on pre-financing invoices to secure quick liquidity because the companies’ payment behavior is falling. Many companies complain about bad debts. It has severe consequences for small and medium-sized companies because they often pay advance payments for goods or services, personnel costs, and social security contributions. Permanent default in payment or even bad debts can, therefore, in the worst case, threaten the company’s existence.
Factoring
Factoring is the purchase or sale of money claims from goods and service transactions. It is a purchase transaction, i.e., it happens on a purchase agreement, not a credit agreement. The combination of pre-financing, assuming the risk of bad debts, and active debtor management is a flexible financing and service instrument, especially for expanding companies.
The advantages of factoring: You can minimize outstanding debts and secure immediate liquidity by continuously selling exceptional receivables to a factoring company. In addition, the invoices have insurance against possible bad debts. It means the entrepreneur receives his money, even if the client does not pay.
Another added value is that the factoring company offers relief regarding dunning. Thus, the entrepreneur has his head accessible and can handle his core business. A plannable inflow of funds, which supports the company in growth, and the generation of an increased equity ratio are further decisive plus points. With factoring, the financing volume increases with sales and does not end like a credit line. In addition, companies gain freedom of action and can use factoring strategically. The provision of collateral customary in banking is not necessary.
Factoring can grant existing or potential new customers payment terms up to 60 days. It gives the company a clear competitive advantage. In addition, there are no costs for any discounts previously granted. The expenses for factoring are also offsetting in the discount area. Outstanding debts can be minimized through the immediate payment of the receivables. Due to the improved balance sheet structure, the reputation of rating agencies and banks is also increasing.
The factoring model is adapted individually to the respective needs and the company’s industry. However, due to certain branch conditions, factoring is not suitable for all branches of the sector.
Fine Trading: Flexible Purchase and Goods Financing
The pre-financing of orders often costs small and medium-sized companies valuable liquidity. Since the order is not yet profitable, there is often a lack of financial means to make advance payments. Fine trading is an option to raise capital. The financing solution is suitable for all companies that want to finance their lead times for their orders as required.
Fine trading is a triangular transaction whereby the fine trader acts as a middleman. The company negotiates the goods order with its supplier. The fine trader orders directly from the supplier, and the supplier sends the goods to the company. It confirms the proper receipt of the delivery. The supplier then sends the invoice to the fine trader, who pays the supplier using a discount. The middleman retains a small additional fee-based margin. Finally, the company receives a payment term from the fine trader up to the expected delivery of goods.
Fine trading immediately improves liquidity. It means that additional projects can be financed and implemented. Immediate settlement of the invoice improves the supplier’s image and strengthens the negotiating position. It can lead to better prices and discounts in purchasing negotiations.
Suppliers also achieve advantages through fine trading. The purchase financier takes over the risk of default, meaning incoming payments can be planned and made immediately. Liquidity planning is simplified, and the balance sheet improves by reducing receivables. In all this, there are no additional costs for the suppliers. With some fine trading providers, however, the financing volume is limited. It is agreed upon individually before the cooperation.
Leasing: Balance-Neutral and Liquidity-Friendly
Leasing can be an alternative financing solution if companies want to invest in new machines or company vehicles. It saves the credit line at the house bank and the equity. Companies have much room to maneuver through tailor-made solutions for more liquidity when leasing.
The leasing rates are adjusted individually. With these ongoing monthly expenses, entrepreneurs can better calculate their finances. However, the leasing rate also represents a block of fixed costs that extends over the entire term of the contract. The installment payments can be tax deducted as business expenses and are fully deductible.
Leasing leads to a tax reduction since investment-related taxes, such as trade tax, are no longer applicable. However, the lessor remains the legal owner of the leased property. However, this has the advantage that the leased object does not appear on the lessee’s balance sheet. There is also the option of buying the leased property during the term of the leasing contract. Leasing rates are usually a bit higher than those for a debt-financed purchase.
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