Question

actoring accounts receivable is a form of financing used since the days of Babylonian King Hammurabi 4,000 years ago. Today it's still a source of Short-term funds used by small businesses. Visit www.21stfinancialsolutions. to get more in-depth information about factoring and be prepare d to ss the pros and cons of factoring to the class

Answer 1

Factoring:

Factoring is considered as a flexible form of financing that helps in improving the cash flow of the company.

Several companies get into cash bind by providing credit to immediate funding would be required for certain expenses like its customers for 30 days but also immediate funding would be required for dealing with certain expenses especially payroll. This problem worsens if there is increase in sales. Factoring can be a solution for all these problems because the invoices can be used as collateral for short term funds with which all these expenses can be met.

Advantages of factoring:

• Increases the available cash: factoring can provide more cash when compared with the traditional bank lines of credit.
• No arbitrary line of credit amount: the borrowing is made on sales activity hence you are automatically set up to finance your growth.
• Cash flow is more predictable: the speed of cash flow increases & factoring also makes cash flow management easy because invoice is more predictable as to when the customer payments can be received.
• Flexibility in financing: there is no minimum level of factoring or no commitment to factor in the future.
• Improved evaluation of credit: credit reports & help of expertise helps in identifying new customers or changes in the existing ones.

Disadvantages of factoring:

• The cost can mean a reduction in the profit margin on every order or fulfilment of services.
• It can reduce the scope of other borrowing as book debts will not be there as security.
• Factors can restrict funding against poor quality debtors or poor debt spread. Hence all these fluctuations must be managed.
• To end an arrangement with a factor you will have to pay off any money they have advanced you on invoices if the customer has not paid them yet. This may require some business planning.
• Certain customers would prefer direct dealing.
• The dealing of factoring can have an impact on the customers. Hence the organization must be cautious in using a reputed factoring company that doesn’t damage the organization’s reputation.