Question

1) What is meant by Factoring of Accounts Receivables?

2) List 3 advantages of Factoring

3) List 3 disadvantages of Factoring

4) List 3 Factors in the USA.

5) If you are a company that factors your receivables, would you prefer "recourse" or "non-recourse" factoring? Explain your choice.

Answer 1

1) Factoring of Account Receivables: In simple words Factoing is a financial transaction in which enterprise sells its accounts receivable to a third party called as factor at a discount. It is done to meet its present and immediate cash flow requirments.

2) Advantages of Factoring:

1. Factoring provides a quick boost to cashflow. This may be very valuable for businesses that are short of working capital.
2. It can be a cost-effective way of outsourcing your sales ledger while freeing up your time to manage the business.
3. Factors may give you useful information about the credit standing of your customers and they can help you to negotiate better terms with your suppliers.

3) Disadvantages of factoring:

1. Queries and disputes may have a negative impact on your available funding. For this reason, factoring works best when a business is efficient and there are few disputes and queries.
2. How the factor deals with your customers will affect what your customers think of you. Make sure you use a reputable company that will not damage your reputation.
3. Factors will restrict funding against poor quality debtors or poor debtor spread, so you will need to manage these funding fluctuations.

4) Factors In USA:

1. Universal Funding corp
2. Riviera Finance
3. Paragone Finance group

5) In Non-Recourse factoring, a company sells their accounts receivable to a factor, whom then supplies the cash needed to cover the invoices. The difference with non-recourse as opposed to recourse factoring is that the company has no liability with any uncollected invoices. The factor absorbs all the risk. Because non-recourse hold be a higher risk for lenders, the transaction fee sometimes could be higher.

If a company need to choose between recourse or non recourse, it would be better to choose non recourse since it discharges company from its liablity on uncollected invoices.