Fixed advance to finance growth
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A fixed advance is a form of short-term credit which allows the bank to provide the business with a fixed advance of a specific amount, for a specific period (which cannot be modified) and at a fixed rate of interest set in advance for the whole period. It is a cash advance, like cash credit, an invoice advance or a temporary current account overdraft facility.
When the fixed advance is drawn, the current account is credited with the full amount of the advance for a specific period, irrespective of whether the borrower needs these funds for the full period or not. The client can, however, use these funds freely within the clearly defined limits and does not have to provide supporting documentation to use them.
A fixed advance is intended to relieve a business suffering from a temporary, foreseeable and measurable gap between its earnings and its expenses resulting from the operating cycle, between the supply phase (start of the cycle) and the client payment phase (end of the cycle).
Objective: it is used to finance the operating cycle and the working capital and short-term cash flow requirements while waiting to obtain a more suitable form of financing.
Who is concerned
Available to the self-employed and any type of business, a fixed advance is used to meet short-term cash flow requirements known in advance and applies in the following cases:
- start of an activity;
- significant growth of the business;
- relatively long operating cycle that is costly in terms of raw materials;
- opportunities for investment in equipment;
- opportunities for building up stock;
- long terms of payment given to customers;
- prepayment of suppliers so as to benefit from discounts;
- seasonal activity.
An industrial business which produces machinery, that requires significant amounts of expensive raw materials and has a 5-month production cycle, may request a 5 to 6-month fixed advance for an amount corresponding to the purchase price of the raw materials at the time of the purchase. This fixed advance will be repaid by the proceeds of the sale of the end product.
Prerequisites
Documentation or description of the business
- copy of the company’s articles of association;
- group structure if the company is part of a more complex group;
- last 3 audited balance sheets of the borrower and, if applicable, the latest available trial balance;
- recent supporting documentation regarding VAT, tax and social security situations;
- order book (where applicable);
- list of customers and their relative contribution to turnover;
- list of suppliers.
Presentation of the application
- cash flow statement;
- forecast budget showing future working capital requirements;
- calculation of the effect of the discount on cash flow requirements.
Guarantees
For the bank, a fixed advance constitutes high-risk credit. Therefore, guarantees are required depending on the client’s reputation and the extent of the credit line compared to the client’s financial commitments, its turnover and the overall financial structure of the business. The most common guarantees requested for a fixed advance are:
- pledge on business assets;
- the surety of the parent company or partners/shareholders;
- various moral guarantees.
When the partners/shareholders of a business have to stand surety for the company, the bank should be provided with the details of their financial situation.
How to proceed
Duration and amount
Duration
- short-term;
- between one day and one year.
Amount
- fixed amount, unlike cash credit;
- minimum amount often required.
Interest rate
- interest rate depending on the quality of the client, the project and the guarantees offered;
- fixed rate.
Refunds
Payment is made in full at maturity.
Types of credit for fixed advances
Revolving credit
Revolving credit, also called 'permanent credit' or 'renewable credit', is a type of permanent cash reserve which is partially or fully renewed at each repayment. The company can use this freely-accessible credit at any time. Drawing on this credit line works by setting up fixed advances.
Mixed credit (Cash credit / fixed advance)
With a mixed credit line, the credit is like a renewable overdraft facility which allows the business to act within the framework of the credit line granted to it. This can be done by debiting the current account or by drawing a fixed advance.
Bridge loan
A bridge loan, also called a bridging loan, is a credit line where the final maturity date is stipulated in the contractual documents.
Set-up times
The reviewing and processing times depend on the complexity, size and urgency of the case.
Advantages, disadvantages and risks
Advantages
- reduction in cash flow shortages resulting from a gap between the payment of invoices received and the collection of invoices issued;
- rapid payment of suppliers so as to benefit from significant discounts;
- flexibility, allowing the borrower to use the credit freely provided that he/she complies with its duration and limits;
- useful type of credit in periods of interest rate increases as the interest rate is fixed.
Disadvantages
- no possibility of early repayment;
- guarantees may be required;
- cost of the reservation fee or the permanent availability of the credit line, which is due in all cases, whether the credit is used or not.
Risks
It is a form of credit with, in principle, an 'until further notice' duration which risks being taken for granted by the borrower. Yet, if it deems it appropriate in terms of risk, the bank can opt not to renew a fixed advance and to request immediate repayment of the whole of the principal outstanding, plus any unpaid accrued interest.
