- Question 1: Funding the business (5 marks)
You are a credit analyst with No Brainer Limited. The company is experiencing some cash flow problems and is seriously considering factoring its entire receivables balance.
Required
After conducting some research, write a brief (of 300 words or less) report to the board of No Brainer Limited outlining the strengths and weaknesses of such a move. Reference all sources of information using the APA method.
SOLUTION
Factoring of accounts Receivable
This mechanism is very useful for the company as it results in access to cash and thus it is very essential to understand its implications, both positive and negative so that it can be estimated its effects in future. These implications have been discussed below.
The first and foremost advantage of factoring of accounts receivable is the access to cash. Under this arrangement the company sells it accounts receivable for a certain cash amount. Thus it reduces the risk of the company as the issues of slow payment or default is covered (Greg). Also there is no obligation on the minimum amount of account receivable that has to be transferred and it is the sole criteria of the company which accounts receivables have to be factored.
Other advantages of factoring are that it does not require the company financials and thus can be worked upon directly (ACFA). Also it reduces the debt of the company which is accrued as a result of non- payment of account receivable. Thus it results in less exposure to the additional costs of interest.
The factoring also has a few considerable issues. This exchange of account receivable will be associated with payment of premium as the risk will be transferred. (Greg Financial Services. n.d.). Thus it becomes very important that due consideration is made to this payment or amount that has been given up so that the cash received is of substantial amount or in other words the worthiness of premium paid is there. There might be cases that the amount that has been paid or let off as premium is not so high that the amount of cash received becomes insignificant. These are some of the factors that have to be considered.
References:
Fountainhead funding, American Cash Flow Association (n.d.). Factoring or Accounts Receivables Finan cing Defined. Retrieved May 2012, from http://www.fountainheadfunding.com/factoring.pdf
Greg Financial Services. (n.d.). Advantages and Disadvantages of Factoring & Asset Based Lines of Credit. Retrieved May 2012, from http://www.articlesbase.com/finance-articles/advantages-and-disadvantages-of-factoring-asset-based-lines-of-credit-108087.html
LC86
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