cash advance structured settlement

Advances on bills for financing growth

The bank may grant the company (the borrower) an advance on its invoices up to an agreed percentage. In return, the borrower will give the underlying assets as collateral to the bank. The bank is thus given a specific guarantee enabling it to collect the invoices from the customers of the company.

Invoice advance is a form of financing that generally allows companies to mitigate the cash shortfalls that often result from payment delays in order to finance their payment cycle. This is a cash credit, as is the cash credit, the fixed term advance and the temporary overdraft authorized on the current account.

The administrative cumbersome nature of advances on invoices considerably reduces the use of invoice advances and entails the substitution by factoring.

Purpose: to finance the operating cycle, working capital requirements and liquidity requirements following late payment by customers.

Persons concerned

Accessible to the self-employed and to any type of company, the advance on invoices allows to meet cash needs, therefore short-term needs and applies in case of:

1. business growth;
2. long operating cycle;
3. important invoices;
4. significant customer payment time;
5. payment of suppliers with discount.

Example: A company has an important customer of good reputation (eg state enterprise), but wants to pay a large invoice with a delay of 3 months for budgetary reasons. This company will then be able to request an advance on the invoice from its bank in order to meet the need of cash caused by the late payment of its customer.

Preconditions

Company Documentation or Description

• copy of the articles of association of the company;
• structure of the group if the company is part of a more complex group;
• The last 3 audited balance sheets of the credit applicant and, if applicable, the last available balance;
• recent VAT, tax, and social security situations;
• backlog (if applicable);
• list of customers and their relative share in turnover;
• list of suppliers.

Submission of the application

• cash table;
• a projected budget showing the need for future working capital;
• presentation and analysis of debtor quality;
• calculation of the effect of the discount on the cash flow requirement.

guarantees

Although the advance on the invoice is a self-liquidating credit, its risk to the bank is not to be underestimated. Given that the credit risk rests on the final debtor, the bank must ensure the quality of the debtors of the invoices and their sufficient dispersion.

Accordingly, guarantees are required according to the client's standing, its turnover and the overall financial structure of the company, the size of the advance on the invoice and the quality of the debtor of the invoices. The guarantees most usual to secure an advance invoice are:

• the endorsement of the invoice;
• the pledge of the invoice;
• assignment of credit insurance;
• the guarantee of the parent company or the shareholders/shareholders;
• various moral guarantees.

Where the shareholder (s) of an undertaking is required to act as surety for the company, the details of their financial situation should be submitted to the bank.

Practical arrangements

Terms and conditions of application

duration

Determined by the due date of the invoice.

Amount

1. the minimum amount generally required by banks (administrative burden);
2. advances generally limited to approximately 80% of the invoice amount;
3. the amount, if the advances on invoices are granted on the basis of a cash credit

Interest rate

The cost of the invoice advance consists of the following:

1. the variable interest rate on the cash credit plus a margin depending on the quality and the risk of the customer
2. a lump sum per invoice, including the costs of sending by registered mail the invoices, endorsed, etc. ;
3. a commission if the advance is granted under a line of credit;
4. the pro rata interest is calculated on a pro rata temporis basis (pro rata to the time already spent), at the expiry of the advance by debiting the current account of the undertaking which undertakes to ensure that its account be supplied.

Refund

Repayment of the advance is made at the end of the invoice by the payment of the debtor (buyer or customer of the borrower) in the books of the borrower's bank.

Implementation deadlines

Of course, the time taken to investigate and deal with cases depends on the complexity, the importance and the urgency of the case.

Advantages, disadvantages, and risks

Advantages

• reduction of cash shortfalls resulting from a delay in the payment of invoices received and the collection of invoices issued;
• fast payment of suppliers in order to benefit from significant discounts;
• self-depreciation since the advance is refunded by the customer's payment.

disadvantages

• relatively high cost due to administrative cumbersomeness;
• the requirement for credit insurance by the bank;
• the cost of the booking commission or the permanent availability of the credit line, which is due in all cases whether the credit is used or not.

risks

Risk of default by the debtor (to be covered by credit insurance)

Example of Advance Invoice Operation

Parties:

1. the bank opening the credit;
2. the company (the borrower/seller);
3. the customer of the company (the commercial debtor or the buyer).

• remittance and endorsement of invoices by the borrower to the bank which pledges them;
• the bank sends by registered mail the original of the invoice endorsed to the debtor of this invoice by signifying to him/her the pledge;
• setting up the advance on the invoice by crediting the company's current account (or cash); this implementation takes place in principle 8 days after the invoice has been sent to the debtor customer, thus allowing time for the final debtor to show up for a possible dispute;
• collection of interest at maturity of the advance by debiting the company's current account;
• repayment of the advance by the payment of the final debtor (purchaser) in the books of the borrower's bank.

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