Corporate financing for the repayment of short liabilities
This may sound strange but a corporate financing for the repayment of short liabilities (your obligation that you have to pay within a year) does indeed occur. A situation in which this can occur is if your short assets (obligations of customers that have to be paid within one year) are smaller than your short liabilities. This means that you have a liquidity shortage. This could be solved by financing the deficit with a long-term business loan. In other words, by replacing the short-term obligation with an obligation that can be repaid over several years; a long-term business loan. As a result, more cash is available because the amount that has to be paid within a year is now divided over several years.
How does this occur?
It may happen that you have used cash for the purchase of tangible fixed assets such as a machine, a truck or an inventory. However, if this money was required for the financing (growth) of your working capital (financing of debtors or stock) because it is growing, a liquidity problem arises.
When is it possible to finance short-term repayments
Financing for a short-term repayment is not always possible. The company must be financially sound and the balance must allow this. In principle, you are the next requirement;
- Your business must be profitable. Without profit this loan can not be paid back,
- a part of your tangible fixed assets (machines, real estate, transport, etc.) is not charged with a loan.
If your company has a negative solvency (equity). It will be a lot harder but not impossible. In such a situation a 'sale and lease back' could be financed.
A 'sale and leaseback' is a transaction in which you, as an entrepreneur, sell a part of your tangible fixed assets (such as machines, vehicles, real estate), and then lend / lease this from the buyer. In this way the transaction acts as a loan, where payments take the form of a lease.
