Question

What is primary trade-off that results from factoring receivables, from the perspective of the organization that sells the A/R to the factoring company? min 200 words

Answer 1

The Primary trade off is a kind of selling one thing to the party in order to get the funds for purpose of meeting the obligation to pay or to use the funds for the specific purpose in a short time span of 1 year or less and this is a result of factoring, which means that the factoring is a financial transaction involve selling of invoices or accounts receivables to the financing company who buys the accounts receivable at discount called factor. The companies decide to choose factoring when they are short of funds for meeting short term requirements rather than waiting for the payments from their debtors and thus helps in transferring the bad debts accounts to factor.

There are two types of factoring as mentioned below :

1) Factoring with recourse - The factoring with recourse allowed the company to impose the burden on the shareholder in case of the faliure of the payment form the companies client. For example a company issue invoice to ABC INC. of amount $ 1500 and the client refused to pay that amount to the company and the company first put that amount to the loss by charging it to the profit and loss account and then transfer this impact to the shareholder in the way of sharing less profits among the shareholders.

2) Factoring without recourse - The factoring without recourse is not a burden for the shareholders of the company and because the amount of the loss due to the faliure of the payment by the client, the shareholder will not suffer the loss in the dividend by the non recovery of the debtors.