Question

Many firms factor receivables in order to speed up cash flow. Assume that you are a manager who is in a position to decide whether to factor receivables or to collect them in-house. What factors would you take into consideration before choosing a financing arrangement involving receivables? What factors would you consider before choosing the entity that will help you with the financing? There are plenty of things to think about, so try not to give a superficial answer.

Answer 1

Factoring

This refers to outright sales of accounts receivables to a factor or a financial agency.

The factors to be considered before factoring receivables are below.

Immediate Receipt of Cash:- The biggest advantage of factoring is the immediate conversion of receivables into cash and predicted cash flows. Financing receivables with the help of factoring can help a company having liquidity without creating a net liability on its financial condition. In case of in house collection we should wait till the debtor pays the amount which results into shortage of working capital.

Management of collection process:- Factoring is a flexible financial tool providing timely funds, efficient record keeping and effective management of collection process.This is not considered to be as a loan. There is no debt repayment, no long term agreements or delays associated with other methods of raising capital.

Cost of Factoring:- In addition to the factoring fees, take a look into the additional costs incurred by factoring the receivables. Knowing this extra cost will help you to determine; is it worth factoring the receivables or in house collection.

Impact on Balance sheet:- As factoring has a direct impact on your balance sheet, determine the impact and choose to factor or not. Assess the pre factoring position and post factoring position to find out the impact on your balance sheet.