Question

ZARA

1. Should ZARA consider “factoring” over “asset based” financing for all of part of its product management? What are the pros and cons in this consideration?

2. What are the financing risks associated with manufacturing offshore and what are the various financing instruments that might be employed to mitigate these risks?

Answer 1

ZARA should consider factoring over asset based financing because it will help the company having more liberal approach and flexible approach as there is no collateral required in factoring and it can be very good use of account receivables, and other short term debt for funding office various projects.

Advantage of factoring are as follows-

A. It will help in generation of immediate cash flow

B. It will help in protection from the bad debt as if you are choosing non recourse factoring.

C.Factoring will help in giving useful information about credit standing of your customers.

D. It helps in obtaining a smooth cash flows.

Disadvantages of factoring as follows-

A.it will reduce the profit margin because it has a cost involved related to it

B.it will reduce the scope of other borrowing as book debts will not be available as security

C. it can damage the reputation of the company.

Overall there are various advantages and disadvantages associated with factoring so the company should be selecting based upon its need and protection of asset from collateral.

there are various financing risk that is associated with manufacturing offshore and there are various financial instrument to hedge the risks like future contracts and forward contracts along with swapping of the risk and sharing of the risk in order to avoid all those financial risks.