A way to improve financial liquidity
Financial liquidity and constant access to cash, apart from the profit generated by enterprises, are among the most important goals of the company. It is often influenced by factors beyond the entrepreneur's control, which may result from irregular payments of contractors, collapse in demand, changes in raw material prices, or the emergence of strong competition. What is the possible way to improve financial liquidity?
One of the most popular forms of improving financial liquidity is the working capital loan. It is used to finance the current activity of the enterprise, e.g. purchase of goods, materials, settlement of current liabilities. The loan is usually granted for a period of 12 months, but the banks also provide for the possibility of signing an agreement up to 36 months. We distinguish between revolving and non-revolving loans. The latter may be granted once or in several tranches.However, in the first of them, the entrepreneur has the option of renewing the loan. A necessary condition for such a situation is that the liability is fully paid before the end of the repayment date. The undoubted advantage in this case is the fact that such a loan can be repaid many times. The repayment of the amount of the obligation allows you to restart the limit.
The loan costs depend on many factors, including, inter alia, the financial condition of the enterprise, its business profile, time of running a business, and credit history. On their basis, the bank estimates the credit risk. The basic cost of a loan for an entrepreneur is interest. However, depending on the bank, other fees may also be charged, for example: a commission for considering a loan application or a fee for opening an account. A significant disadvantage of this form of lending is the difficulty in obtaining appropriate forms of collateral required by banks, which is a particular problem for start-ups.
An interesting alternative to a working capital loan is a credit line. A given financial instrument is a designated credit limit up to which the entrepreneur can indebted. The indebtedness is revolving, and the amount and term of the indebtedness are determined voluntarily. In addition, unlike the working capital loan, the entrepreneur has an impact on the repayment of the liability, as only the minimum amount (interest) is required. It is also possible to avoid paying interest if the liability is returned before the specified repayment date (usually it is a monthly settlement period). The term of the credit line agreement usually lasts up to 12 months, with the possibility of automatic extension of the limit for another year.
The fees are set individually by banks. However, you should not take into account only the interest rate (WIBOR 1M + margin), as financial institutions anticipate additional costs of having a credit line. They include: fees and commissions for granting a line, its renewal, change of the limit amount at the client's request. Banks may also introduce additional commissions on the unused loan amount. It should be remembered to monitor the loan on an ongoing basis when using the credit line, because unpaid liabilities will generate higher and higher interest. This simple method of financing can be a trap for overly greedy entrepreneurs.