As the name suggests, it is an advance financing. This bridges the period until the final, final financing. It is usually short-term and takes place at a time when the final financing has not yet been secured. The final financing is usually not guaranteed at the time of the pre-settlement funding for formal or time reasons. With this type of financing, the bank is taking a high risk, as the final financing and the repayment of the pre-settlement funding loan have not yet been determined. The duration of this type of loan is usually 1 to 2 years.
How does it differ from the interim loan?
The main difference between these two types of funding is follow-up funding. With pre-settlement funding, the time to the final financing is bridged, the starting point of which has not yet been precisely determined. In the case of an interim loan, the time of the refinancing is known because this financing has already been granted. The pre-settlement funding has a longer term than the interim loan. As a rule, an interim loan is only granted for a few weeks to months, with pre-settlement funding lasting 1 to 2 years. An interim loan is always adjusted to the current interest rate, with pre-settlement funding paying high interest rates.
What are the advantages and disadvantages of pre-settlement funding?
The most important advantage is the immediate availability of financial resources. This type of financing is therefore very useful as a short-term bridge. In the case of pre-settlement funding, the entire loan amount is paid out. Another advantage is the flexible repayment through the following loan. The main disadvantage is the additional cost. These come about through the processing of the pre-settlement funding and the processing of the subsequent financing. Further disadvantages are the term and the interest. The pre-settlement funding interest rates are sometimes very high and the term is usually limited to 2 years.
Pre-settlement funding for customer debts
The main motivation for companies to choose factoring is the funding function. The customer has 30 days to pay his bill and it can therefore take this period of time to see his money. In the case of large amounts and / or many customers, many companies choose to take out external financing in the form of factoring or the sale of accounts receivable.
Because as soon as the two partners agree, the factoring institute transfers the sum of money immediately, which means that the company, as the original claimant of the invoice amount, has the money immediately available to finance investments, plug financial holes or simply in day-to-day business to work with. It is an actual pre-settlement funding for money that otherwise might not have been paid for a month – and even later if it is delayed.
The financing function is therefore also a tool to immediately improve the financial resources and, depending on the form of factoring, you do not have to work with the collection if there is a delay in payment. Of course, with all the advantages of pre-settlement funding, it is important to consider whether this sale of receivables really pays off. Otherwise you would have seen the money later and would have to choose other strategies for financing, but factoring is not exactly free and therefore it can lead to the realization that you drive better without factoring.
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