Page 296 - DMGT207_MANAGEMENT_OF_FINANCES

Unit 13: Receivables Management

In addition to purchasing of receivables, the factor firm may provide the following additional Notes
services:
1. Raising funds on the security of the receivables

2. Receivables collection management, and,
3. Protection against defaults by the receivables.
4. It may be noted that a firm need not avail all these services from the factor and the
agreement between the selling firm and the factor firm may be tailor made to suit the
specific needs of the selling firm. In a nutshell, the functions of a factor may be described
as credit investigation, credit administration; credit monitoring, credit collection, credit
protection and credit financing.

Benefits and Costs of Factoring

The factoring is nothing but a substitute for in-house management of receivables. Factoring
offers a very flexible mode of cash generation against the receivables. Once a line of credit is
established, factoring helps availability of cash at an earliest opportunity after sales. Factoring
tends to increase the number of rotations by converting credit sales into cash. A firm availing
factoring services may have the following benefits:
1. Better cash flows: The seller can offer credit to the customers, within the terms approved
by the factor and can receive prompt payments shortly after invoicing. This may be
cheaper than financing and therefore, can be availed if the firm expects a liquidity problem
on a regular basis. In fact, the factoring ensures a definite pattern of cash inflows from the
credit sales.

2. Better assets management: The security for such financial assistance is the receivable itself
and therefore, the other assets will remain available as security for other borrowings.
3. Better working capital management: Since, finance available from factoring moves directly
with the level of the receivables, the necessity of additional working capital to match the
sales growth does not arise.

4. Better administration: The debt management services which factors provide relieve the
seller of the burden of administration and saves on the cost of staff and office space. In
other words, it enables the seller to concentrate on developing his business.
5. Better evaluation: The debt management service may include formal or informal advice
on credit standing. Factors hold large amounts of information about the trading histories
of firms. This can be valuable to those who are using factoring services and can thereby
avoid doing business with customers having poor track record.

6. Better risk management: In case of non-recourse factoring, the seller will have the advantage
of repositioning the risk of customers not paying their due bills. This will cost more than
recourse factoring and thereby allows the seller to escape the consequences of customer’s
default.
However, the factoring involves some monetary and non-monetary costs as follows:

Monetary costs:
(a) The factor firm usually charges substantial fees and commission for the collection of
receivables.

(b) The advance finance provided by the factor firm would be available at a higher
interest costs than the usual rate of interest.

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