Page 272 - DMGT405_FINANCIAL%20MANAGEMENT

Financial Management

Notes 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:
1. 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.
2. Non-monetary costs:
(a) The factor firm doing the evaluation of the creditworthiness of the customer will be
primarily concerned with the minimization of risk of delays and defaults. In the
process, it may tend to ignore possible sale prospect.
(b) A factor is a third party to the customer and the latter not feel comfortable while
dealing with it.
(c) The factoring of receivables may be considered as a symptom of financial weakness.
Thus, while evaluation the use of factoring services, the firm must analyze the costs
and benefits associated with the factoring. It may be noted that though factoring is
a costly service, yet some firms may find it to be more economical than to establish
their own collection department.

Self Assessment

Fill in the blanks:

9. Factoring is a collection and finance service designed to improve the cash flow position of
the sellers by converting ………………..into ready cash.
10. The ………………is a substitute for in-house management of receivables.

11. The advance finance provided by the factor firm would be available at a ………........interest
costs than the usual rate of interest
12. The factoring of receivables may be considered as a symptom of financial ………………

12.4 Managing International Credit

Credit management is difficult task for managers of purely domestic companies, and these
tasks, become much more complex for companies that operate internationally. This is partly
because international operations typically expose a firm to exchange rate risk. It is also due to
the perils involved in shipping goods to long distance and to cross at least two international
boundaries.
Exports of finished goods are usually priced in the currency of the importers’ local market.
Therefore, a US company that sells a product in Japan, would have to price that product in
Japanese yen and extend credit to Japanese wholesale in local currency (yen). If yen depreciates
against the dollar before the US exporter collects its account receivable, the US company experience

266 LOVELY PROFESSIONAL UNIVERSITY