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Encyclopedia > Factoring (finance)
Corporate finance

Working capital management
Cash conversion cycle
Return on capital
Economic value added
Just In Time (business)
Economic order quantity
Discounts and allowances
Factoring (finance)
Look up factor in Wiktionary, the free dictionary. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Image File history File links Download high resolution version (1031x740, 688 KB)Midtown Manhattan looking North from the Empire State Building, 2005. ... Corporate finance is a specific area of finance dealing with the financial decisions corporations make and the tools as well as analysis used to make these decisions. ... Cash conversion cycle or CCC, also known as the asset conversion cycle, net operating cycle, working capital cycle or just cash cycle, is used in the financial analysis of a business. ... Return on capital, also known as Return On Invested Capital (ROIC) is defined as NOPLAT / Invested Capital usually expressed as a percentage. ... Economic Value Added (EVA) is an estimate of true economic profit after making corrective adjustments to GAAP accounting, including deducting the opportunity cost of equity capital. ... For other uses, see Just In Time. ... Economic Order Quantity (also known as the Wilson EOQ Model or simply the EOQ Model) is a model that defines the optimal quantity to order that minimizes total variable costs required to order and hold inventory. ... Discounts and allowances are modifications to the basic price. ...

Capital budgeting
Capital investment decisions
The investment decision
The financing decision
Capital investment decisions
The process of determining which potential long-term projects are worth undertaking, by comparing their expected discounted cash flows with their internal rates of return. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ...

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Managerial finance
Financial accounting
Management accounting
Mergers and acquisitions
Balance sheet analysis
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Managerial Finance is that branch of finance that provide tools for a companys financial managers. ... Financial accountancy (or financial accounting) is the branch of accountancy concerned with the preparation of financial statements for decision makers, such as stockholders, suppliers, banks, government agencies, owners, and other stakeholders. ... Management accounting is concerned with the provisions and use of accounting information to managers within organizations, to provide them with the basis in making informed business decisions that would allow them to be better equipped in their management and control functions. ... The phrase mergers and acquisitions (abbreviated M&A) refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling and combining of different companies that can aid, finance, or help a growing company in a given industry grow rapidly without having to create another business... This article needs additional references or sources for verification. ... A business plan is a formal statement of a largely enforced business goal, the reasons why they are believed attainable, and the plan for reaching those goals (Fiifi Essel). ... A corporate action is an event taken by a public company that has a direct financial impact on of its shareholders. ...


Finance series
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Finance studies and addresses the ways in which individuals, businesses, and organizations raise, allocate, and use monetary resources over time, taking into account the risks entailed in their projects. ... This article does not cite any references or sources. ... There are two basic financial market participant catagories, Investor vs. ... Domestic credit to private sector in 2005 Corporate finance is an area of finance dealing with the financial decisions corporations make and the tools and analysis used to make these decisions. ... Personal finance is the application of the principles of finance to the monetary decisions of an individual or family unit. ... This article does not cite any references or sources. ... For other uses, see Bank (disambiguation). ... Financial supervision is government supervision of financial institutions by regulators. ...

v d

Factoring is often used synonymously with accounts receivable financing. Factoring is a form of commercial finance whereby a business sells its accounts receivable (in the form of invoices) at a discount. Effectively, the business is no longer dependent on the conversion of accounts receivable to cash from the actual payment from their customers, which takes place on typical 30-to-90-day terms. Businesses benefit from the acceleration of cash flow by obtaining cash from the factor equal to the face value of the sold accounts receivable, less a factor's fee. Image File history File links Question_book-3. ... Accounts receivable is one of a series of accounting transactions dealing with the billing of customers who owe money to a person, company or organization for goods and services that have been provided to the customer. ...


Factoring is considered off balance sheet financing in that it is not a form of debt or a form of equity. This fact makes factoring more attainable than traditional bank and equity financing. Off balance sheet usually means an asset or debt or financing activity not on the companys balance sheet. ... For other uses, see Debt (disambiguation). ... For other uses, see Stock (disambiguation). ...


There are usually three parties involved when an invoice is factored:

  • Seller of the product or service who originates the invoice.
  • Debtor is the customer of the seller (i.e., the recipient of the invoice for services rendered who promises to pay the balance within the agreed payment terms).
  • Factor (the factoring company)

Contents

Types of factoring

Notified, or full service factoring

With notified factoring, the debtors are aware of the finance facility as there will be a notice of assignment contained on each invoice and the factoring company normally does the credit control, that is, collects the outstanding debts.


Confidential, or invoice finance

With invoice finance (sometimes called confidential or non-notification factoring), the factoring facility is undisclosed, with the seller usually retaining the credit control function.


Recourse factoring

Recourse factoring is now the most common type of factoring transaction. This factoring transaction allows the factor to go back to the seller if payment is not received (normally after a 90 day period). The credit risk does not transfer to the factor during the recourse factoring process.


Normally, in the event of non-payment by the customer, the seller must buy back the invoice with another invoice (credit worthy). Recourse factoring is typically the lowest cost for the seller because the risk for the factor on the funding transaction is lower.


Non recourse factoring

Non recourse factoring is the traditional method of factoring and puts the risk of non-payment, in the event the debtor becomes insolvent, fully on the factor. If the debtor cannot pay the invoice due to insolvency, it is the factor's problem to deal with and the factor cannot seek payment from the seller. The factor will only purchase solid credit worthy invoices and often turns away average credit quality customers. The cost is typically higher with this factoring process as the factor assumes a greater risk.


With all of the above, the seller of the invoices (factoring client) can take advances against the accounts receivable creating a loan due to the factor (advance factoring), can factor the accounts receivable on a collection basis or factor the accounts receivable on a due date basis.


New Company Factoring

Sometimes, because the seller is a new company, it may find it difficult to secure traditional bank financing. An alternative source of financing in such an instance is to use factoring by selling accounts to a finance company (the factor) in order to gain immediate access to the cash owed to the seller by its customers. Instead of sending bills directly to the customer, the company sends its invoices to the factor, who immediately pays the company–thereby eliminating the 30, 60, or even 90 days of waiting that normally encompasses a billing cycle.


For example, suppose a manufacturing company secures a contract to sell its widgets to a large retailer. Upon delivery of the merchandise to the retailer, the manufacturer sends the bill through the factoring company for payment. The factor immediately pays the manufacturer the face value of the invoice less a discount fee (2–10%), depending on the nature of the contract and the creditworthiness of the retailer. This immediate access to the cash flow allows the manufacturer to meet its commitments and pay its bills in a timely manner. The retailer pays the factor when the bill comes due for the widgets it purchased from the manufacturer.


Factoring can be a very expensive source of financing and is only recommended to companies that are growing faster than their current financing permits. Because factoring can be expensive, many companies use it only as a financing means of last resort. Factoring allows a company that is growing rapidly or is in financial difficulty to focus attention on the operations of its business as opposed to spending time and resources focused on how it will make payroll, for example. Depending on the state of the firm, factoring can be a useful financial tool.


Factoring has been available to a variety of companies for many years. Some factors specialize only in retail financing, others specialize in freight-bill factoring for trucking companies, and others only factor invoices for manufacturing companies. Factoring may be more expensive than traditional bank financing but often it is the only source of financing that some new or under-capitalized companies can find.


Smart Factoring Strategies

When more flexible terms factoring begins, the client can increase prices to its customers by 1% to 5% to help cover the cost of factoring.


In many industries, customers expect to pay a few percentage points higher to get flexible sales terms. A client can seek a cash discount from a supplier in return for prompt payment, many times from 2% up to 10% (depending on the industry standard). In essence, the supplier is self factoring his own invoice by receiving a discounted payment amount from his client. When a client makes a cash payment on the day of purchase from suppliers, the client can profit from a large cash discount.


With benefits availing to both the supplier and the customer, the cost of factoring can be covered by using smart factoring strategies.


See also

Capital formation is a term used in national accounts statistics and macroeconomics. ...

External links

  • About.com article on invoice factoring
  • United Nations Convention on the Assignment of Receivables in International Trade 2004
  • 'Role of "Reverse Factoring" in Supplier Financing of Small and Medium Sized Enterprises'
  • Compare factoring quotes online with Simply Business

 
 

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