The non-recourse factor charges higher fees than the recourse factor.Even the bad debts are zero in the case of non-recourse factoring. You can see that the bad-debts percentage is fallen as soon as a factor is appointed.The company will bear only $ 856,834, which is lower than inhouse management of AR. Since the cost of managing the AR is least under “Non-recourse factoring”, the company should choose the same. Rate of Interest 80% advance by factor = 80% * 9%Ģ0% amount = overdraft from bank = 20% * 7% But what if the company needs funds for that 20% as well? It can get an overdraft for the same as per the old rate. The factor will advance only the 80% portion. The factor will ensure that customers pay within 35 days & thus, it will charge interest only on the amount lent for 35 days. The interest rate charged by the factor on the advance amount The data is as follows: Turnover of the companyĬurrent Bad debts to turnover ratio under factoringĪdvance payment by a factor (% of turnover) Below is the summary of events that takes place:įor a comprehensive understanding of accounts receivable factoring, let’s have a covered example of whether the company manages the receivables in-house or is recourse factoring or non-recourse factoring. The first tranche being advance payment by the factor to the entity, and the second tranche being paying the balance amount after adjustments. Many of the factoring arrangements are executed in two tranches. Let’s have a quick go-through of how it work using the following image:.The good thing about factoring is that the default risk (if any) is not to be borne by the company but by the factory. Thus, blocked cash flow due to credit customers is released with the help of factors. With the money in hand, the entity can use it for business purposes (i.e., buying raw materials, paying for existing outstanding obligations, salary to workmen, etc.). This helps the entity to receive cash on an immediate basis rather than waiting for the due date. In turn, the factor collects the payments on account of receivables from the said customers on those specific due dates as agreed in the sale invoice. After the entity has sold the goods on credit to a customer, the factor finances the company with the said amount.So, the agreements are entered with the factoring entity in multiple ways, either through the sale of an asset (i.e., accounts receivable factory) or through the actual receipt of a loan (with interest payable to a third party).Now the responsibility of “managing the account receivables” is with an organization that is an expert in this field.
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