Ignacio Lezaun

English edition
2021

Fundamentals of Finance

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Contents of the course

1. The role of the Chief Financial Officer

2. Statement of cash flows
3. Working capital management
4. Short-term finance instruments
5. The time value of money
6. Conclusions
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Unit 4: Short-term finance
instruments

OBJECTIVES
◼ Managing Short-Term Financing with explicit cost

◼ Factoring

◼ Confirming

◼ Loans and commercial credits

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3. What is Factoring?

A financial operation by means of which

a company transfers its collection rights (accounts receivable) to a third
party (bank or other specific financial entities) that will be in charge of
managing the collection. In return, the factoring company will pay the
amount of the assigned invoices, less a discount. Client Company pays
directly to the Financial
entity

Company transfers
Company issues invoices to financial
invoice to client entity
Client Company Financial
Financial entity
entity
pays to the
Company
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Types of factoring

1. With Recourse

The bank does NOT assume the risk of non-payment and can act

against the transferor company of the invoices in case of non-payment of
the client.

2. No Recourse

The bank DOES assume the risk of non-payment and cannot act against

the transferor company of the invoices in case of non-payment of the client.
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4. What is Confirming?
(also known as Reverse-Factoring)

A financial service that allows managing the  payments  of a company to its

suppliers. The company delegates the payments function to the financial entity,
that informs the suppliers that it has instructions to make the payment on the
due date. The supplier may wait or collect the invoice in advance, being financed
by the bank.

Financial entity
Financial entity notifies the
Company issues company, that it has the
Company notifications Confirming available

Supplier
The supplier decides whether to anticipate the
invoice at the financial entity or wait for it to
expire.
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5. What is a loan?

 A Financial Instrument, through which a Financial Entity lends

an amount to the borrowing Company. Said amount must be returned to
the Bank within the agreed terms and with the agreed interest

 Types of loans (according to their purpose) include:

 Short term seasonal loans

 Investments
 Mortgage
 Participative
 Convertible
 Syndicated
 Project-finance (e.g. infrastructures)
 Bridge
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Loan characteristics and types

• Characteristics to be negotiated in a Loan:

 Loan amount
 Type of interest
 Amortization term
 Grace period (or interest-only period)
 Commissions: Study, opening, early repayment, early cancellation
 Guarantees

 Loan Types:

 French - Maintains Quota Fixed-

 German - Maintains Fixed Principal Amortization-
 American - bullet -
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Reflections

• How many entities do we have to work with?

• What elements do we have to assess when doing

financial planning?

• How do we choose the type of product to use?