Factoring
This financing option is most suited to companies operating in the business-to-business (B2B) section and issuing invoices with a deferred payment options. E. Volskis noted that factoring has become the most popular option in transportation, civil engineering, manufacturing, and sales industries. Most often, companies use factoring with invoices of up to 1 million euro.
"In the light of alternative financing market growing, factoring has become accessible to even extremely small enterprises because the creditors offering alternative funding apply very basic minimum requirements. For example, a company must have a 6-month operation history, and its turnover should be around 30-50 thousand euro. The creditors usually finance invoices with the maximum deferral term of 120 days," says E. Volskis.
In this case, one should note that creditors usually insure the amounts receivable and ask for no additional guarantee from the company. Factoring allows companies to receive money for unpaid invoices right away without pausing significant business growth and development processes. In other words, the constant cash flow is guaranteed and the integrity operations is protected.
Reverse factoring
This type of invoice financing is beneficial to companies that are not granted deferred payments by the suppliers, or the offered deferral terms are exceedingly short. In reverse factoring, the creditor pays the supplier for the goods or services and extends the client's payment deferral period. According to E. Volskis, this financing option brings the most benefits in seasonal business or when implementing one-of-a-kind projects. Of course, reverse factoring is usually more accessible to stronger businesses with a longer history of operations and a strong budget structure because the client must pay back the loan upon the due date of the invoice.
"We notice that most of our clients use the reverse factoring services when seeking to increase their stock, ensure seasonal growth, get better prices from suppliers by offering an advance payment, also implement non-standard business projects that are usually one-time endeavours. The reverse factoring cycle usually lasts for 30 to 120 days and is customized to suit the needs of each client and its business. Companies usually choose the funding limits of 50 to 250 thousand euro," says E. Volskis.
Credit line
This financing option could be defined as a renewable fixed-rate loan, the key advantage of which is paying interest on only the funds actually used. This is a flexible financing tool for managing the cash flow.
The credit line loan can be paid back any time when the company has funds available.
""This product is firstly and foremostly useful for businesses with no stable capital turnover, in other words, when a company needs to cover expenses while waiting for issued invoices to be paid. The line of credit is useful to seasonal businesses as well because they can pay just the interest each month and then pay back the entire loan at the end of the term, after receiving the major influx of income. The standard term for a credit line is 1 year and the limits range from 10 to 500 thousand euro"," says the Head of Risk and Operations of Factris in Lithuania.
According to Mr. Volskis, the data available to Factris show that the standard factoring option accounts for 75% of the entire financing portfolio and is the most popular option at the moment.
How to get funding?
Entrepreneurs wishing to use additional funding should first clearly answer the question of what the purpose of these funds is going to be. This way, creditors will better understand the business's nature and offer the most suitable funding type with little or no delay.
E. Volskis notes that when considering reverse factoring or credit line, companies should be ready to present their visions for using the funds and professional qualifications and experience of management personnel, the level of shareholder involvement, and their attitude towards business management. They should also be able to detail the cash flows and prove that they would be sufficient to pay back the loans. According to E. Volskis, factoring remains one of the simplest funding methods, with creditors applying flexible financing terms and conditions due to the clear-cut and most often insured source of loan repayment.
