Question

#2 please explain to get a better idea to provide examples.

Why would a company be willing to sell its accounts receivable at a discounted amount (i.e., the amount received from the buyer is less than the recorded amount)? Give at least three reasons and explain why.

Answer 1

The reasons for which the company will be willing to sell its accounts receivable at discounted amount are as follows:-

1. Offering Net-30 to Net-60 Day Terms

The biggest problem of offering net-30 or net-60 day terms to clients is that it affects cash position. The company have to pay for delivering your product/service, and then wait one to two months to get paid.

Meanwhile, the company still need money to pay for ongoing expenses to run the business.

When it comes to offering net-30 terms, small business don’t have much of a say in the matter. Most companies, especially larger ones, pay their invoices in 30 to 60 days. It is in their contracts and is usually non-negotiable. The company just have to offer terms if you want to work with them.This puts company in a financial catch. The company want to grow your business and take on new clients.

So, one way to solve this problem is to sell accounts receivable and realize cash immediately so that the company can expand its business.

2. Pay important expenses

One of the most important advantages of using a debtor finance programme is that your company will have enough liquidity to meet critical expenses such as wages, taxes and supplier payments. This liquidity is critical for maintaining smooth operations and fostering growth. Many a times company needs funds for payment of important and urgent expenses. So discounting accounts receivables helps company to meet the fund requirements for payment of expenses.

3. Limited Interest

Discounting has a further advantage over conventional loans and credit arrangements. Like a credit card or line of credit, discounting requires the borrower to pay interest only on the amount of cash actually in use at a given time. This can make discounting an attractive option for businesses with frequent but transient needs for short-term funding. This is especially attractive for businesses that can use the improved cash flow to benefit from early payment discounts with their suppliers. This arrangement saves the interest cost for the company. So, the company will be attracted towards this financing arrangement.

4. It can be deployed quickly

Most debtor finance solutions, such as factoring and invoice discounting, can be deployed fairly quickly. This rapid deployment can help companies that have an immediate need due to cash flow problems or new opportunities. Depending on the complexity of the opportunity, deployment can be done in around 10 business days.