Banking & Finance Q&A – My company needs to raise funds quickly – What are my options?
In this regular question and answer forum experts from Nexus Law Group will help answer any questions you might have on banking, finance, loan security or mortgages, or anything else to do with borrowing, lending and banks and financial institutions.
Question: My company needs to raise funds quickly and, ideally, cheaply to ensure we can make our upcoming payments. However, our customers are not due to pay us for over a month under the terms of our supply agreements with them. Overdrafts are expensive, so what are my other options?
Answer: While taking out an overdraft or loading up your corporate cards might seem like the easiest solution, you’re correct in saying that it will cost you – overdraft interest rates can be over 10% per annum and corporate credit card rates can be well over 15%.
Fortunately, most banks like customers that have future income coming into them, even if it’s not immediately available. And they’ve designed a variety of speciality loan products to help you out in this situation, all of which look to trade off your future income streams.
Trade finance facilities or invoice discounting facilities are some of the most common, and while they have different names at different banks, they all work in the same, or a very similar, way. You secure your right to receive payment from your customers in the future to the Bank, in return for immediate funding from the Bank. The bank will exercise its security over these payment rights if you don’t repay the amounts you owe to the bank in time, and you’d have to transfer them to the bank to repay your debt.
Let’s take an example. You need $50,000 of short term funding to meet unexpected payments or pay your staff their monthly salaries, but you don’t have the immediate funds available. What you do have is $55,000 of accounts receivable on your balance sheet, which are due to you in 45 days’ time. 45 days is too long to wait. You need funding now.
The bank will happily secure your right to receive this $55,000, and make a loan to you for $50,000. The $5,000 difference reflects the ‘interest rate’ for this type of product – perhaps better described as a discount rate – and is a measure of the Bank’s risk if it has to exercise its security and try and claim on these receivables in 45 days’ time. While your customers have every intention of paying in 45 days’ time, some might default, and the bank would then receive less than its $55,000. The bank builds this risk into the discount it charges.
We’ve dealt with all of the banks, on both sides, on these receivable financing transactions, and would be happy to discuss them in more detail with you if this is something that might be of interest.
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