What components play a role in financing? What is the optimal funding mix?
Bank wants to retain directorial role
The bank is currently frantically trying to maintain its governing role. On the one hand, by restructuring its own loan portfolio. On the other by making linkages with a (limited) part of the newly emerging financing variants and instruments. All in all, they do withdraw more and so alternative forms of financing have become more important. But the role of supplier credit is also increasing.
Different possibilities
You can roughly divide the liabilities side of a company's balance sheet into three categories:
- The supplier credit without collateral, optically this looks like free credit
- Bank credit and other loans, granted under pledge of collateral etc.
- As a residual item equity, or capital accumulated through retained earnings
Opportunities abound, were it not for the fact that these three categories strike a shaky balance. Indeed, both the turnover rate of working capital, as well as the return on equity and the interest cost on financing raised vary continuously.
Issues
One way to measure whether tied-up capital can work for you is by using the "cash conversion cycle". This is a yardstick to measure the period from the purchase of raw materials or goods, to payment by your customer. In general, the longer this cycle, the less this tied-up capital can work for you. On the other hand, the return you enjoy by giving your customers a longer payment period (supplier credit) could be profitable.
In short, not everything seems what it is and there are multiple ways to get business finance. The trick is to find the perfect balance. The specialists at Xolv advise you on this.
