Choose the right financing formula to meet your liquidity requirements

To meet its temporary liquidity requirements, your company uses short-term financing. For example:

• to cover cash deficits that arise from temporary differences between receipts and expenses;
• to finance stocks;
• to bridge peak periods:payment of salaries, expiry of bills of exchange, etc.

The overdraft is the simplest form of credit on the market.

This type of credit is a safety valve, a treasury reserve. It is held in a regular current account. Only a maximum credit amount (limit) is allowed. Cash credit results in various debit and credit transactions during the term of the credit. Within the limits of the credit, the borrower can always make new withdrawals until the expiry date, the termination or the suspension of the credit. This is why it is called revolving credit.

A straight loan is a short-term credit facility that is taken out in a single instalment in order to finance a temporary requirement in euro or other currency.
The term (max 12 months) is fixed in advance and the interest rate is that of the day when the contract was concluded. The amount is taken out in a single or in several instalments and repaid completely on the agreed expiry date.

In the case of factoring, the bank (the factoring company) pays the customer advances on invoices.

The financing is provided as a debet balance in a current account (cash credit rate) or as advances (see straight loan).

The credit lines are determined per individual debtor and are based on balance sheet data, payments record and publications (non-payment protests, etc...). Depending on the type of contract, the advances amount between 75 and 85% of the value of the transferred invoice.

Factoring is a service offered by Fortis Commercial Finance, a subsidiary of Fortis Bank.

Advantages and limitations

The overdraft provides greater flexibility of use and is not limited by any formalities. Liquidities can be withdrawn by means of cheques, money transfers, electronic banking, etc.

The straight loan is less flexible than cash credit because the term and the amount are determined in advance. However, it is cheaper.

The straight loan cannot be renewed and cannot be extended. On the other hand, you can apply for a new straight loan on the expiry date, at the current market conditions.

The term varies from 1 day to 6 months and exceptionally 1 year. Given that this product is used to compensate for certain peaks, a short term is usually chosen.

The interest rate is generally lower than for cash credit and interest is only collected when the term of the advance expires.

The straight loan is more suitable for the larger SMEs and especially for large amounts.

Factoring is a complete service:

• collection and follow-up of invoices produced by the customer
• cover for debtor insolvency risks
• automated accounts receivable
• advances on invoiced amounts.

An additional advantage of factoring is the fact that debtors usually pay third parties faster than paying their supplier directly.

However, some companies don't like the disadvantage of a credit limit per debtor.

For which companies are these products suitable?

The analysis of the cash situation provides a clear indication of the most suitable type of short-term financing. The bank advises companies to make a treasury plan so they are able to identify the needs in an organised manner. The customer and the bank review the short-term expenditures and costs.

In the case of an overdraft, it is mainly the borrower's solvency, his reputation and experience that are taken into account.

Straight loans are generally used by corporate customers and SMEs that have substantial current treasury needs and try to cover these requirements by taking out short-term loans with interest rates that are usually lower than for other credit facilities.

Many companies use factoring to reinforce their debtor strategy, to cover the collection of overdue debts and to cover the risk of debt defaults.
Factoring solutions even accommodate for companies with a turnover of less than € 250.000.

A few tips

Current account overdrafts that occur on a permanent or regular basis are an indication of permanent insufficient liquidity or a need for long-term financing.
If this is the case, you should discuss the issue with your bank to avoid paying these expensive overdrafts.

Factoring is certainly recommended for companies that are growing strongly. When the turnover of a company increases suddenly, it may not be possible to obtain additional credit due to the solvency and the reputation of the company. In that case, factoring, and specifically advances on invoices, is an excellent solution.

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