10.6 Debt factoring Flashcards Preview

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Flashcards in 10.6 Debt factoring Deck (4)
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1
Q

What is debt factoring?

A

A financial agreement whereby a business sells all or selected accounts receivables at a price lower than the resale value to a third party (known as the factor) who takes responsibility for collecting money from the customers.

2
Q

What are the two types of debt factoring?

A

1 With recourse - the borrower maintains control over the receivables and collects from customers
2 Without recourse - the factor maintains control and bears the responsibility for bad debts

3
Q

What are the advantages of debt factoring for short term finance?

A
  • provides an immediate source of finance
  • useful to rapidly expanding companies as it leaves other lines of credit open
  • start-ups can benefit where they cannot currently access other sources of credit
  • the factors’ credit control systems can be used to asses the creditworthiness of customers and suppliers
  • reduces probability of bad debts
  • non-recourse factoring allows for insurance against bad debts
4
Q

What are the disadvantages of debt factoring for short term finance?

A
  • factoring can be expensive
  • outsourced debt collection can put-off potential customers and suppliers and damage relationships
  • company risks losing control over receivables
  • company bears the risk of non-payment

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