Question

what are the advantages and disadvantages of the two methods used to convert accounts receivable to cash? Write out in 4 paragraphs.

Answer 1

Advantages and disadvantages of two methods which are used for conversion of account receivables into cash are as follows-

A. Factoring of receivables will be helpful in order to generate the Liquidity into the company and it will also be helpful in selling out with the bad debtors and recovering money out of them from a third party

Disadvantages related with factoring of receivables is that company will be losing out the control on the collection process and these are sold at a discount to the third parties.

B. Pledging of receivables is another method of converting the account receivables to cash. Advantages related to this method is that they can use their debt receivables in the form of collateral to get a loan and company will be having the control on the collection process.

Disadvantage related with playing of receivables is that the rate of interest on these loans are generally higher than the rate of interest on the conventional loans and their assets are kept as collateral so there is a risk of getting seized.