AR and AP Management (3)

Question 1

What is invoice discounting?

Answer 1

The selling of selected sales invoices to a third party for a discounted cash sum, while retaining full control over the receivables ledger

Question 2

What happens when a business enters into an invoice discounting arrangement?

Answer 2

A finance company will provide a cash advance as a percentage of the outstanding sales invoices − usually in the region of 80%

Question 3

What happens when customers pay their invoices or new sales invoices are issued?

Answer 3

The amount advanced will fall or rise to maintain the level of finance at 80% of the receivables

Question 4

Advantages of invoice discounting?

Answer 4

Improved cash flow

Flexibility, amount of financing rises and falls with level of activity

Confidentiality, customers are aware business is borrowing against invoices

Question 5

Disadvantages of invoice discounting?

Answer 5

An expensive form of financing compared to an overdraft or bank loan.

Business has fewer assets available to secure other forms of borrowing if finance company takes legal charge

Question 6

What does finance company charge?

Answer 6

A monthly fee for the service, and charge interest on the amount advanced

Question 7

What if lender thinks there is a customer with high credit risk?

Answer 7

Require a floating charge over the trade receivables of the business and may refuse to lend against some invoices

Question 8

When discounts are most suitable?

Answer 8

For companies which are selling to customers with high credit ratings and a good payment record

Question 9

What are debt factors?

Answer 9

Businesses offering a range of services in the area of sales administration and the collection of amounts due from customers.

Question 10

How does debt factoring differ from invoice discounting?

Answer 10

The business does not retain responsibility for the management of its credit control system

Question 11

What elements does debt factoring contain?

Answer 11

Accounting and collection

Credit control

Finance against sales

Question 12

What is often carried out together with credit control?

Answer 12

Accounting and collection

Question 13

Usual fees for an invoice value?

Answer 13

Between 0.5%−2.5% of invoice value, plus a charge for cash advances

Question 14

Finance against sales characteristics?

Answer 14

Advances a percentage (e.g. typically between 50% and 85%) of the value of sales immediately on invoicing

Question 15

Accounting and collection characteristics?

Answer 15

The company is paid by the factor as customers settle their invoices or after an agreed settlement period.

Question 16

What is the main advantage of factoring (cash collection)?

Answer 16

Enables the business to concentrate on generating sales and leaves the collection of cash to a third party

Question 17

What is the main advantage of factoring (reduce problems)?

Answer 17

It reduces the cash flow problems often experienced by new businesses and can give access to cash immediately rather than having to wait 30 or more days

Question 18

Disadvantage of factoring?

Answer 18

It is expensive and in the long term it may be cheaper for a business to establish its own receivables management systems

Question 19

What is factoring with recourse?

Answer 19

Bad debts remain the company’s problem

Question 20

Example of factoring with recourse?

Answer 20

The supplier takes the risk of the debt not being paid

Question 21

What is non-recourse factoring?

Answer 21

Bad debts are the factor’s problem. In effect, the company is insured against bad debts. Fees are higher for non-recourse factoring.