financing for your business

What short term financing for your business

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The short-term financing of your activity involves short-term bank loans ensuring the balance of your cash flow. Find out which ones!

Short-term financing, definition

The financing of your activity requires short-term bank loans. These loans are used to ensure the proper balance of your company’s cash flow. They will be useful to you, for example, to cover storage time or when you have granted a payment term to your customers.

During health crises (e.g. Covid-19), cash flow financing is particularly vital in VSEs or SMEs. The State, through the BPI, supports deposit banks to finance the cash flow of companies, in order to help them overcome the economic crisis that we are experiencing and to support them in the recovery phase, and this, without soliciting manager’s endorsement.

Short-term financing is for a period of less than or equal to 1 year, and does not exceed 60 days of customer payment, as provided for by law. They can be renewed if your financial situation allows it (your banker can, however, call them into question at short notice). Find out, in this article, which loans could meet your short-term financing needs .

What short-term financing solutions?

Entrepreneur, how to finance your activity and the cash flow of the company? Several types of financing are to be considered, depending on the equity of the partners and the activity carried out.

SELF-FINANCING

Equity, that is to say the capital and current accounts of partners. The funds made available to the company by the partners are an interesting and flexible financing solution compared to the contributions incorporated into the share capital. Current account funds are recoverable at any time, subject to available cash.

Love money  : these are funds provided by friends or family, often when the business was created, to help the project leader to start and develop his project .

NEGOTIATE PAYMENT TERMS

One of the sources of financing is to work the difference between the payment of the suppliers and the payment of the customers. The number of days for supplier payment terms should be as high as possible. At the same time, it is desirable that the customer payment period be as short as possible.

The sums at stake will increase with the development of your turnover, and this is a crucial issue that many VSE managers do not know how to understand and anticipate.

CASH FACILITY

The overdraft facility is a temporary overdraft , which means that the bank will honor the payments you have made, even if your account is in debit . It allows cash flow management, i.e. immediate cash outflows (fixed charges and invoices, contributions, etc.) from your company, taking into account the lag between outflows (“disbursements”) and expected cash inflows (“cash-ins”). The overdraft facility is used for short-term financing of temporary, unforeseen and transient cash shifts.

To benefit from this short-term financing method, you must first negotiate and sign a contract with your bank, setting out the conditions of the overdraft facility in terms of its duration, authorized amount and interest rates.

The “tolerance” of the bank is of course punctual, and the account must become credit again afterwards. In general, the maximum duration of use of the overdraft facility is 15 days per month , with no minimum use. Thus, you can be overdrawn during part of the month, while again becoming creditor the other part.

In exchange for the short-term financing of the overdraft facility, the bank will take agios from your accounts (bank charges, interest proportional to the size of the sums credited and the length of the repayment periods). Your bank may also modify the conditions or delete the contract unilaterally provided that it states the reasons for this decision and respects the regulatory notice.

BANK OVERDRAFT AUTHORIZATION

The bank overdraft authorization is similar to the overdraft facility. The main difference is that your account will not be required to be in credit at least 15 days in the month . This permission is useful when you have operating cycles that are quite long.

You will also negotiate a contract with the bank containing the main conditions of use in terms of its duration, the amount of authorized overdraft and interest rates. The maximum amount allowed will be determined based on your operating needs.

The term of the contract for this method of short-term financing is generally a maximum of one year , with no minimum usage. Thus, you can only use the overdraft when it is useful, and therefore save costs. The contract termination conditions are identical to those of the overdraft facility.

The great advantage of the bank overdraft is to be a flexible credit, set up quickly and whose cost is relatively low, because the interests are calculated only during the effective use of this one.

But, just like for the overdraft facility, you will have to pay agios, and, at the end of the accounting year, you will have to make a balance sheet with your bank, in order to evaluate the conditions of use of your authorized overdraft. and, possibly, to renew it.

A licensed accounting professional who has taken the CPA exam could help you with all your business’ accounting and taxation needs.

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