Question

PLEASE DO NOT ANSWER THIS IF YOU DO NOT KNOW IT. Last time I posted, someone literally copied and pasted from an article and it was very difficult to understand.

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 is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.Rather than waiting for the due date, a company may quickly convert its receivables into cash by selling them to a factor for a fee which is usually a small percentage of the total value of the receivables being factored. As the due date approaches, factor meets receivables and collects full amount of cash.The difference between the cash collected from receivables and the cash paid to the seller company forms the profit of the factor.

2) Advantages of factoring

Time Savings. Factoring can save you time and effort that would otherwise be spent on collecting from customers. That energy can be redirected to other business activities.

More Funding. Factoring firms will typically give a cash advance on up to 80% of your receivables, says Napolitano. That may be more than you would be able to get from a bank.

Doesn’t Require Collateral. Unlike traditional bank loans, factoring doesn’t require you to risk your home or other property as collateral.

3) Disadvantages of factoring.

Less Control. Once you accept cash for your receivables, you give up a measure of control. For example, the factoring company could deny your ability to do business with a particular customer because of its poor credit history or rating

The Cost. While it may be necessary to have immediate access to cash, it will come at higher price than loans. Factoring companies usually keep between 1% and 4% of a receivable as their fee. Additionally, Napolitano says, they charge interest.

Credit terms.The factoring company may enforce credit limits for your customers to keep them from owing too much at once and then possibly defaulting later.

4) Three factors in USA

• Lendvo. ...
• USA Factoring. .
• Universal Funding Corp.

5) Recourse Financing’s primary benefit is that it can be less expensive than non-recourse financing because the factoring company is only assuming partial rather than full liability. Because of this, if you have rock-solid clients where there is little or no worry about the invoices being paid, you may opt for Recourse Financing to save some money.

With Non-Recourse Financing, once your business sells its invoices to the factoring company, it is considered a done deal. You never have to deal with those invoices again and if they go unpaid or get paid late, the factoring company assumes all risk and responsibility of collecting those invoices or taking the loss on them.

So as Non recourse factoring has a big risk as regarding to a factoring company i would prefer Recourse factoring always.