The average commercial payment time is currently about 60 days, a statistic that has increased sustainedly in recent years. The negotiation of credit terms with other companies will accumulate over time a significant asset in its balance sheet called commercial accounts receivable or receivable.
Debt financing is an overview of the type of financing used by commercial collections as collateral for a cash payment. Technically, there are several legal models of debt financing. In some cases, it is simply regulated as a loan, with outstanding assets as collateral, such as a home mortgage.
On the other hand, the general slump involves the legal ownership of the debt transferred to the funder, perhaps undeclared – that is, the debtor is not an amount – or is often fully disclosed when the debtor is aware of the financing agreement.
When debt financing is in the form of a debt utilization agreement, available cash advances can be adjusted flexibly based on a percentage of debtor sales that provide a high level of convenience to develop businesses and need more liquidity to do so.
Security requirements for debt financing
The court’s decision to make a decision on the application of the court’s decision was based on the author’s request.
As with other forms of credit associated with the value of the underlying guarantee, the amount lent or financed will depend on the value of the assets. Normally, debt financing is authorized between 70% and 90% of the value of the debtor’s invoices.
Advances and cash flows
The docking arrangement, which involves funding the entire ledger, can work as effectively as an overdraft. This means that within total financing limits, taking into account factors such as bad debt when they occur, the borrower can withdraw any amount and repay it at any time.
Microfinance mechanisms, which include billing financing or deductible billing agreements, generally divide financing into two blocks of cash flow:
The first block is the advance, compared with 70% to 90% of the value of the invoice
The second block is the balance sheet, from which funders recover costs.
Each financing method has its advantages and disadvantages. L.A.L.A. financing usually includes certain contractual obligations for a period of at least 6 months, often a year or more. Financing invoices, on the other hand, are generally short-term and may not require a specific compromise. Invoices are very flexible when used in an ad hoc way, which helps reduce costs, but overall there is a need to more closely monitor actual cash flows.
When is the best option to finance debt financing?
Debt financing is very useful for a company with a relatively long cash transfer period relative to the cost of its main supplies. The best explanation is the example: if a company has to pay all its bills on average, for example, 21 days, but the settlement conditions for most of its customers are 45 days or more, the expansion of the business will always absorb more money than what is in the business in the short term.
This type of cash flow stress often occurs in manufacturing, wholesale, and labor leasing companies; In fact, any business where the sale cost is made is largely made up of labor costs and/or inventory.