Advance capital benefits

Small and medium-sized enterprises are finding it increasingly difficult to access financial instruments and markets. Due to the economic context, the risk of insolvency increases, on the one hand, and, on the other hand, the need for financing from companies, mainly due to difficulties with customer payments. With increasing liquidity requirements, financing costs also increase. For small and medium enterprises, the main source of financing, in addition to domestic financing, is still bank credit.

One of the tasks that must be solved is, of course, strengthening the equity ratio, which positively affects the rating and solvency of the company. Another important task is to find and use alternative or additional forms of bank credit. Small and medium-sized companies are mainly family-owned or owner-managed companies in which decision-making authority is concentrated on one or more people.

The participation of third parties in capital and their subsequent participation in company decisions are often not condemned; therefore, classic bank financing is still preferred. This type of financing has actually worked for decades: the banking system for a long time provided capital to the developing economy, capital, which was then returned on time with fixed interest.

Only in recent years has this type of financing become less accessible: the financial crisis of 2008 actually forced the competent authorities to tighten financial markets. Since then, banks have also had to deal with stricter regulations and ensure accurate risk management with the obligation to strengthen their own capital and set aside part of it for each loan granted. The amount of these reserves depends, in turn, on the solvency of the funded party.

The lower the rating of the company, the more difficult and expensive bank financing becomes. Each loan must be adapted to the individual needs of the company and proportional to risk. Only with the right form of financing or with the right combination of financial instruments is it possible to sustainably contribute to the success of the company.

Choosing the most suitable financial instruments takes time and a lot of information. However, companies cannot always devote themselves to due attention and preparation for financial issues, which are often delayed or undervalued. Credit costs are only one of the crucial aspects of choosing the right financial instruments; timing, risk optimization, and choices based on actual needs also matter.

Advance capital disadvantages. What is liquidity? Having cash means having enough money to pay bills, wages, rents, taxes, etc., on time.

Thus, the time factor comes into play: all late payments must be made on time. It’s not enough to rely on future earnings. In a narrower sense, the term “liquidity” indicates, in addition to immediate solvency, the set of payment instruments (immediate liquidity) available in the company, that is, cash and an active bank balance. Liquidity can be analyzed in a static way, therefore, referring to a specific date, for example, a reporting date, or dynamically, referring to a period, for example, a fiscal year.

Business disruptions are often related to liquidity issues. Many bankrupt bankruptcies can be avoided by planning liquidity in the company. To this end, all critical elements for future payments should be considered a priori. Possible problems can only be detected by planning the forecast. In this sense, it is very useful to check all receipts and payments for the last year of work or even for the last two years, so as not to miss any annual payments (for example, insurance premiums, taxes, thirteenth and fourteenth).

Periodic programming of liquidity, preferably on a monthly basis, allows you to maintain control over income and expenses and quickly recognize and eliminate any difficulties. Only those who evaluate possible missed payments can take them into account when planning liquidity and include a “safety margin”. Many companies notice insufficient liquidity only when payments are required. However, often there is not enough time to obtain additional financial resources from domestic financing. Even an interview with your bank will not lead to an immediate supply of liquidity. Overcurrents on the current account affect the relationship with the bank and the rating of the company.

In addition to periodic monitoring of liquidity flows, it is advisable to provide for reserve liquidity. An important tool is the classic current account with a credit line, which serves mainly to cover peaks in liquidity requirements.