Friday, December 9, 2011

Accounts Receivable Management (Week #6) Factoring, Types of Credit & Four C's of Credit

Accounts Receivable Management #15 Factoring

Factoring is a tool that businesses use in order to speed up their accounts receivable accounts. Companies that run into a cash flow problem sell their invoices or accounts receivable. The factor company advances the invoice amount between 70% and 90% to you. Once the bill is paid by the customer then the balance is paid minus the factoring fees. Normally, a company can have their money paid in 24 to 48 hours. Most companies that select this method tend to have a credit issue with their lender so this is an alternate choice for obtaining funds.

Factoring adds additional cost to the bottom line of doing business. For this reason companies will affect their profitability so for the long term it will increase your operating expenses. However, the reverse is true some businesses may use factoring when they are starting up to increase the cash flow. As the business grows, they are then able to increase revenues until they no longer need the factoring company.  

Accounts Receivable Management #16 Three Types of Credit

There are three types of credit accounts that a company uses to support its credit sales:

Revolving Credit
In a revolving account, you may pay in full or a partial payment. Interest or finance charge accrues on the unpaid balance.

Charge Agreement
In a charge agreement, you agree to pay the entire balance with the store or merchant that you have the account. No interest charges accrue because the balance is paid monthly.

Installment Agreement
The customer signs a contract to pay a set amount each month, over a period, to pay for the product. Autos, furniture, appliances and other durable goods are paid in this manner.

Accounts Receivable Management #17 Four C’s of Credit

The four C’s of credit refer to character, capacity, capital and conditions. All of these are found in a company’s credit report.

This includes the history of the company, number of years in business, number of employees, location, lawsuits, judgments, stock performance, liens, and overall status

This C is concerned with ability to meet obligations, cash flow. Capacity is concerned with the structure of debt, secured and unsecured along with lines of credit.

This C is concerned with the financial resources to repay creditors. Much attention is given to the balance sheet, net worth and cash flow. Capital is the more important C because of the ability of a company to meet its obligations.

This section focuses on external factors affecting the business such as market fluctuations, industry growth, legal concerns and currency rates.

The four C’s are taken into consideration by creditors, insurance providers and lines of credit with vendors, etc. in order to conduct business.  These four C’s determine the risk involved of doing business.

1 comment:

  1. Accounts Receivable management helps a company to free up working capital that may be tied up in their inventory.