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So choose the type of financing according to your capital needs

August 21, 2020

6 min read

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So choose the type of financing according to your capital needsSo choose the type of financing according to your capital needs

By: Edmundo Montaño, CEO of Drip capital Mexico.

  • Define the reasons why you need funding.
  • Set priorities.
  • Study exactly what your current leverage is and what your solvency will be.

The coronavirus has kept the global economy in check and is, in turn, a major challenge for the financial functioning of companies, especially SMEs and startups. So much so that 91% of them according to a recent one from the National Institute of Statistics and Geography (Inegi).

In times of uncertainty, financial liquidity, i.e. cash, as well as the speed with which receivables and supplies are converted into money, must be a priority for entrepreneurs and managers.

Likewise, the flexibility of obtaining a new loan, the limits approved by financial institutions, and the interest rates are now a higher priority. Keep in mind that there are generally two reasons you might need funding to start this selection process:

  • Investments (Capex). Long-term investment in an asset that adds value in some way: land, plant, machinery, new product research, etc.

  • Operating costs (Opex). Daily expenses necessary for the functioning of the company: payroll, rent, raw materials, energy, etc.

Once that is established, you can define your priorities: is it more urgent to renovate a facility, or the complications of covering salaries, paying to suppliers, and even shipping your goods?

An intermediate step is to examine exactly what your current leverage is and what your solvency will be, especially considering the costs of your operations and the risks to your market, which are exacerbated by the COVID-19 pandemic.

Financing options for Capex

Photo: Depositphotos.com

The most important are the traditional loans that banks offer companies, where they receive a certain amount of money in return for a future promise to pay with additional costs (interest).

Your approval and line of credit depend on a previous rating and it is requested an asset as collateral with a value greater than the loan.

Its advantages include:

  • The opportunities they offer you to accelerate your growth and invest in it.

  • Increase your company’s return on investment.

  • Financing costs are deducted from your income, saving you taxes.

On the other hand, financial leasing or leasing should also be considered for material goods – such as machines and devices.

It consists of a contract where a landlord provides you with a specific asset for a fee (or rent) for a set period of time. The main benefit is that it is an activatable expense (i.e. promises to pay that are converted into money or tangible capital).

In contrast, you should know that within this scheme you do not own the property and that you need to negotiate and evaluate the terms and related obligations well.

Financing options for Opex

Photo: Depositphotos.com

A first alternative is that revolving credit lines, in which you count a authorized limit with which you only access the capital you need at the time (similar to credit cards). When you stop using the money, pay it back to the bank so as not to generate interest on that amount.

It should be borne in mind that this scheme also tends to need an asset as collateralAlso, increasing your sales level or growing at some point may not be enough.

Another great option is that Factoringespecially since it is a short-term financing that only applies to the loan period of the invoice.

It basically consists of funding your bills by converting your receivables into cash.

Unlike credit, factoring is financing that works like a commercial transaction: a factor (i.e. who is offering the financing) prepares the payment of invoices that a buyer will pay on credit without you having to buy collateral.

This means that it will appear on your balance sheets not as debt, but as cash.

So what is appropriate?

Photo: Depositphotos.com

Again, it depends on what you need when applying for funding. For example, using traditional bank loans to fund your business is complex and difficult to optimize: there may be times when you have more money in a few months and still have to pay interest on that money, or you may lack it.

This shouldn’t put you off on credit, as debt is indeed a good and necessary thing: investing in key areas of your finances is important and, as mentioned earlier, it will help you save on taxes.

One of the conclusions to highlight is that it is important to properly manage these capital injections.

The bank loans or leases that you can take out are therefore perfect for unlocking other sources of capital and investing in investments. Other options like factoring will help you face short-term challenges and meet your obligations in a timely and formal manner. immediately (Opex).

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