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Eight concepts to understand the 'working capital'

Companies, just as individuals, have financial needs related to the management of liquidity and working capital in the short term. The term ‘Working capital’ makes reference to those solutions, which include ‘factoring’, ‘confirming’, bilateral loan, commercial discount, guarantees, ‘leasing’ and ‘renting’.

Liquidity and working capital are essential for any business and for their financial robustness and continuity. Let’s take a closer look at these concepts:

  • Credit account: A bank account with a credit availability limit. The consideration is only for the interest on total drawdowns, usually in 6-month or 1-year timeframes.
  • Commercial discount: another source of short-term credit, that ensures liquidity and financing to tackle short-term operations in exchange for payment of interest and management expenses. It is very similar to ‘factoring’, the main difference being that the discount is applied on any means of payment, not only on invoices issued (for example: promissory notes).
  • ’Factoring’: this financing product where customer commercial credits (invoices issued) are transferred to a financial institution that will be responsible for the collection thereof with a consideration in the form of interest and management expenses.
  • Guarantees/collaterals: These products are intended to ensure compliance with assumed obligations, and vary depending on the asset or the exact conditions between the lender and the borrower.
  • ‘Leasing‘: It is a financial lease service that grants the lessee a purchase option, for example, industrial equipment, transport vehicles or equipment goods. The owner is the bank that buys it from a supplier at the customer’s request and at the price agreed between them. At the end of the lease, the lessee has the option to purchase the asset by paying a final fee.
  • Bilateral loan: financing where the borrower and lender agree on the rights and obligations that both parties must fulfill.
  • ‘Renting’: is a rental contract for an asset in which the lessor agrees to transfer the right of use over said asset in exchange for a recurring fee paid by the lessee. Both ‘leasing’ and ‘renting’ refer to very similar concepts. The main difference between them is that a renting agreement does not confer the lessor the right to purchase of the asset at the end of the term. Also, while in a lease, the lessor can only be a business or a freelancer, renting products are also available for individuals.. Finally, renting agreements are usually more expensive than lease agreements.
  • ’Reverse factoring’ (‘Confirming’): A product for payment to suppliers, which allows them to collect the invoice in advance in exchange for interest and management fees.

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