Professional Documents
Culture Documents
MEANING
Factoring is a financial option for the management of receivables In simple definition it is the conversion of credit sales into cash In factoring, a financial institution (factor) buys the accounts receivable of a company (Client) and pays up to 80%(rarely up to 90%) of the amountimmediately on agreement. Factoring company pays the remaining amount (Balance 20%-finance cost-operating cost) to the client when the customer pays the debt
MEANING
factoring against goods purchased, factoring for construction services (usually for government contracts where the government body is capable of paying back the debt in the stipulated period of factoring. Contractors submit invoices to get cash instantly), factoring against medical insurance etc.
Customer
Invoice
Client
Pays the amount (In recourse type customer pays through client)
Factor
CHARACTERISTICS
Bank factoring occurs when a business sells some or all of its accounts receivable to bank in exchange for a cash payout The payout usually represents a large percentage of the amount due in the accounts receivable After the payout, the bank then takes on the role of collecting the accounts receivable, and it pays off the remaining amount due, minus discount fees, to the business once all accounts are collected The process of bank factoring begins with the business selling its accounts receivable to a bank, which then acts as the factor in the transaction
Bank immediately gives the business a lump sum payment that represents a large portion of the amount Once those payments are collected, the bank then returns the remaining money owed the business from the accounts receivable, but only after taking out its own discount fees The bank usually bases its fees on the amount of money owed the business, the amount of time given the debtors to pay, and the credit status of those debtors Bank factoring is especially useful for small businesses that may not yet have the capital to show for all of their enterprises
ADVANTAGES
DISADVANTAGES
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CASE STUDY
James Manufacturing is a small builder of boat trailers and related products in Southwest Florida. Bill James, its owner, was awarded a contract to supply the th 72 new trailers Each trailer was $2,900 for a total value of $208,800 James had 20 trailers in inventory to begin delivery James Manufacturing had little excess capital James did not receive payment for the 20 trailers he could immediately deliver for nearly 45 days... He needed cash to order bulk steel and hardware to build the remaining 52 trailers and delver them in 60 days before deadline James had virtually no credit history still went for loan to bank officer
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CASE STUDY
The loan officer explained that what James really needed was factoring. Later,James was introduced to the bank's factoring officer where an account was immediately established to provide the necessary working capital to meet the order. Through factoring, James would receive an initial advance from the bank of $46,500 (80%) on the $58,000 invoice after delivery of the 20 finished trailers in inventory. That advance of $46,500 was enough to then buy the bulk steel and hardware to complete the other 52 trailers in time to meet the required delivery deadline. After the state paid for the 20 trailer shipment, the bank would then give James the $11,500 not initially advanced less a small factoring fee for services.
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CASE STUDY
The bank's factoring arrangement helped James to bid on many more contracts The factoring arrangement geared the business of James It sped up the company's cash flow Discount for materials paid for almost 75% of the bank's factoring fee making the overall expense for the factoring facility miniscule Beside, arrangement with the bank had almost no upper credit limit.
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Thank You
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