Growth and WCR, short-term financing

Any growth in a company's activity linked to an increase in sales, purchases and inventories has the leverage effect of increasing the working capital requirement (WCR). Through this mechanism, it is necessary for companies to manage their cash flow, their financial resources and to reinforce their equity. These points are vital for their survival, because their lack of anticipation is one of the main causes of their disappearance, especially for start-ups. On average, one company out of two closes its doors before celebrating its 5 years of creation.

Financing resources for working capital

The market distinguishes three types of financing:

• The short term (less than 1 year), it allows to finance the daily activity of the company,
• The medium term (between 1 and 5 years) dedicated to the development of the activity,
• The long term (more than 5 years) for investments.

We will discuss short-term financing here. Medium and long term financing will be discussed in later articles.

Short-term financing

Short-term financing is a type of loan designed to deal with one-time or limited-time situations. Their purpose is to strengthen the company's cash position and to anticipate one-off cash flow shortfalls linked to the nature of the business. Cash flow is the amount of money a company has at a given moment in its cash and bank accounts. Among the consequences of poorly managed short-term financing are :

• Lack of cash or negative bank account,
• Rejections of direct debits for insufficient balance, cheques, bills of exchange, etc,
• the denunciation of bank loans by the bank, i.e. all the credits or short-term loans granted,
• seizure or third party notice (ATD) on account.

Solutions for financing short-term cash needs

Solutions for finding short-term financing can take different forms:

• The authorized bank overdraft and the overdraft facility. These are fairly common means of financing cash flow. In general, the use of the overdraft facility does not exceed a fortnight.
• The current account of associate. It corresponds to advances of funds made by the associates, for a temporary help to overcome a cash flow insufficiency. The advance in current account is refundable at any time at the request of the associate or the manager who advanced the funds.
• Mobilization of receivables. This operation consists in transferring the receivables to a third party in order to obtain immediate cash. The main advantage of such an operation, for the company, remains the possibility of being paid in advance compared to the due date of the invoice. The mobilization of receivables can be realized around :
  • The bank discount (alternative to the bank overdraft) or commercial discount. This last solution offers the customer the possibility to pay his invoice before the due date, in exchange for a discount. These two formulas allow the company to obtain the immediate payment of a debt, without waiting for its due date.
  • The assignment of Dailly receivables to transform them into credit. This operation can only be carried out with a credit institution (bank, mutual or cooperative bank, factor, etc.).
  • The factoring which consists for a company to transfer its B2B receivables to a specialized financial institution, called the "factor".

For companies, these financial management solutions are a means of financing cash flow capable of coping with short-term cash flow shortfalls.