Lesson: 5 Financing Instalment Accounts How Accounts receivables are priced by factoring
companies
Accounts Receivable Factoring
➢ Factoring companies charge what is known
➢ Is a Financial transaction in which a
as factoring fee. The factoring fee is a
company sells its accounts receivable to a
percentage of the amount of receivables
financing company that specializes in buying
being factored.
receivables at a discount
➢ Accounts receivables factoring are also Factoring of Accounts Receivable
known as invoice factoring or accounts
The rate charged by factoring companies
receivable factoring.
depends on:
Parties in Factoring
• The industry that the company is in.
Financing Company – Factor • The volume of receivables to be
factored.
Credit business – seller
• The quality and creditworthiness of the
Person with liability – debtor company’s customer
• Days outstanding in receivables (average
What are the benefits of Accounts Receivable
days outstanding)
Factoring?
The rate also depends on whether it is resource
➢ Company’s choose factoring if they want to
factoring or non-recourse factoring. Factoring
receive cash quickly rather than waiting for
companies usually charge a lower rate for recourse
the duration of the credit terms
factoring
➢ Factoring allows companies to immediately
build up their cash flow and pay any Recourse plan
outstanding obligations. Therefore, factoring
➢ Factor can demand money back from the
helps company free up capital that is tied up
company that transferred receivables if it
in accounts receivable
cannot collect from customer.
➢ Transfer the default risk associated with the
➢ The seller is liable for any balances due in
receivables to the factor
case the customer does not pay
Factoring vs. Assignment ➢ The selling can do the repossession,
reconditioning and selling of collateral
➢ Borrowing that involves the use of accounts
receivable as collateral for the loan Category of recourse plan
➢ Credit company still retain ownership as
➢ With full recourse – the total amount of the
long as it make payment on time
receivables sold may be collected from the
➢ Customer never know that the credit
seller in case of non-collection
company borrowed against the accounts
➢ With partial recourse – the seller
receivable
guarantees collectability up to stipulated
➢ Lenders charged high fees and interest
amount and is bound to pay portion of the
receivable in the event of non-collection.
Non-recourse plan Statement of Account
• The factor takes on all risk of uncollectable ➢ Monthly statement
receivables. ➢ Detailed statement
• The Factor is responsible for repossession, ➢ Reconciled statement
reconditioning and selling
Analysis of Receivables
• The seller has no liability for uncollectable
receivables ➢ Aging of accounts receivable
➢ Accounts receivable turnover ratio (net
Other usual sources of funds
credit sales/aver accounts receivable)
• Internal accumulation of funds ➢ Accounts collection period
• Borrowings local or foreign sources (365/accounts receivable turnover)
• External accumulation ➢ Collection efficiency
• Conversion of assets into cash. (Amount collected x 100/amount
available for collection)
• Merges, tie-ups and other forms of
➢ Bad debts loss ratio
consolidation where the other entities that
(Amount of bad debts x 100/total
supply much needed funds.
accounts receivable)
Lesson 6: Monitoring and controlling the credit
Twelve (12) Types of Problem Customer
and collection functions
1. Negligent who doesn’t bother with due dates
Aging of accounts receivables
2. Honest but confused who didn’t understand
An accounts receivable aging is a report that list the term to begin with
unpaid customer invoices. All accounts are to be 3. Can’t be bothered who refuses to pay a
aged from the due dates regardless of terms of small balance
payment 4. Seasonal delinquent who fails behind when
his business hits a slack season.
Bad debt write-off
5. Embarrasses late-payer who pays late
➢ Accounts to be write-off must previously through no fault of his own.
recognize as doubtful 6. Chronically slow who makes all creditors
➢ Collection effort made wait until their most liberal suppliers expire
➢ A full written report, or status of the
Roles of Collector
accounts, along with a description of the
effort to collect Collection Objective
➢ Write-off recommendation
➢ To obtain payment promptly at a minimum
➢ In write-off why is there a need for different
cost and to maintain goodwill of the
approval depending on the amount to be
customer or client at the same time
written off?
➢ It involves losses on the part of the business. Other jobs of collector
The bigger the amount involved, the higher the • Action man of his department
rank should approved. • After delivery credit investigator
• Listening post of the customers’ business to adjust to the debtor’s flucturing income.
condition. The amount or repayment should be at its
• Public Relation peak also. For example, farmers should pay
• Financial adviser more during harvest time
6. Settlement of Arrears – Generally if the
Qualification of Good Collector arrearages are substantial, like with
1. Honest substantial down payment.
2. Alert Terminologies
3. Good education background
4. Good PR man ➢ Charge-off – charge without the interest
5. Good health ➢ Write-off – No loan at all
6. Perseverance ➢ Settlement – lesser amount but with
7. Presentable longer term
➢ Balance in Full – one time payment of
Does and Don’ts in Receipting balance
1. Clear and legible Effective Telephone Collection
2. State to whose account the check is
intended 1. Pre-calling Plan
3. Date must be current 2. The collection plan
4. Payee must be the name of the company 3. Follow up
5. Must be signed by the drawer
1.Pre-calling plan
Strategies and Action Plan to Save Account
1. Check whether your own company is at fault
1. Curing or Adjustment 2. Check previous collection efforts
In case there are any problem on balances, 3. Check the customer’s payment record
like reconciliation of accounts, in order to 4. Find out who is the right person to talk with
put the account in proper perspective. 5. Prepare fact-finding questions
2. Extension of the term of the credit, 6. Determine your preliminary proposal
provided this is within the policies of the -Identify yourself and your company
company or bank, provided father that the -Give the reason for the call
collateral/securities position of the creditor -Make a strategic pause
is maintained or even strengthen.
In telephone collection:
3. Restructuring or rewriting the obligation –
Before a restructuring or rewriting, ➢ Be Specific
considered, additional collaterals or security ➢ Urgent
should be required in order to protect the
2.The Collection Call
interest of the creditor.
4. Assumption of Obligation Key Action in Good Call:
Another firm or person with a good standing
is willing to assume the obligation under 1. Identify yourself and your company
mutually acceptable terms and conditions. 2. Give the reason for call
5. Repayment Schemes 3. Make strategic paise
4. Ask fact-finding questions 6. Other similar causes – typhoons, fire,
5. Present your proposal earthquake, and other natural disaster or
6. Overcome objections client’s capacity, illness in the family,
7. Give the benefits & consequences adverse economic trends.
8. Obtain commitment from the customer
Process of analyzing problem accounts
9. Close the call
1. A review of the financial statements of the
3.Follow-up
debtor.
1. Record your notes 2. A review of the debtor’s account history.
2. Update your records 3. A review of the supporting documents to find
3. Take appropriate action out if there are any defects, deficiencies that
4. Recycle, if necessary must be corrected.
4. An ocular inspection of the business, and a
Remedial account management
re-appraisal of the collateral, security of the
Objectives: credit, possibility also to include an
appraisal of the debtor’s assets.
1. To nurse substandard doubtful accounts 5. An interview of the debtors.
back to health.
2. To regularize credit and documentation Skip tracing
deficiencies.
Basic approaches:
3. To strengthen weaknesses of the credit
extension by way of additional collection 1. Subterfuge deceit
guaranty. 2. Candid and straightforward
4. To locate missing customers.
Skip tracing procedures
5. To anticipate debtor’s defense.
Signs of delinquency
Examine & study the
1. Delinquency – non-payment of the obligation Office Skip
credit application &
or installment indication that the account credit investigation Tracing
might be a potential problem account report.
2. Adverse trends – creditor should require
debtor an updated financial statement, as it
can alert an potential problem account
3. Fraudulent information – this is extremely Skip Tracing Field Skip
hard to debtor Reports Tracing
4. Non-cooperation of the debtor –
unwillingness of a debtor to submit updated
financial data
5. Disappearance/Depreciation or Outright
Cannibalization of Collaterals – exchanging
new and expensive parts of a car or truck for
an old part, making the collateral car or truck
less valuable.
