Companies generate accounts receivable by selling goods or services to their customers on credit. Many companies who extend credit to their customers sell their accounts receivable to a factor. Factoring is the buying and selling of account receivables that are due to mature in the near future. It is a specially designed financial service used by businesses to manage their cash flow. Factoring offers a fast and flexible method of improving cash flow and providing working capital for a company. Selling receivable allow a company to take advantage of growth opportunities, stabilize cash flow, and provide for daily operating expenses. A factor is a specialized financial intermediary who purchases accounts receivable at a discount. Under a factoring agreement a company sells or assigns its accounts receivable to a factor in exchange for a cash advance. The factor typically charges interest on the advance plus a commission. The price paid for the receivables is discounted from their face amount to take into account the likelihood of uncollectibility of some of the receivables.
A factor may provide any of the following services:
Factoring is a well known best method of increasing and fixing cash flows. When you factor you are able to sell your receivables for what they're worth and get cash for them right now instead of waiting 30-120 days for your clients to pay you. Once a company enhances its cash flows it can pay off debt, make payroll, pay for overhead and other costs where before Factoring many businesses are crippled due to a poor quality cash flow.
Factoring's origins lie in the financing of trade, particularly international trade. Factoring as a fact of business life was underway in England prior to 1400. It appears to be closely related to early merchant banking activities. The latter evolved by extension to non-trade related financing such as sovereign debt. Like all financial instruments, factoring evolved over centuries. This was driven by changes in the organization of companies; technology, etc.
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.
Factoring Account Receivables is a tool that has been in use for many years. Several Fortune 500 companies use this financial tool every day. These Include IBM, Coca-Cola, Wal-Mart, Georgia-Pacific, Honeywell, Scott Paper, and Shell Oil. There are numerous types of factoring arrangements. Some of the basic types vary the treatment of credit risk assumption and customer or debtor notification. When the factoring agreement involves the purchase of accounts receivable where the factor bears the risk of a customer or debtor failing to pay the client for reason of financial inability it is a non-recourse or without-recourse agreement. In the situation where the client must bear the risk of nonpayment due to financial inability, the agreement is a recourse agreement. In many instances, factoring agreements provide for accounts to be purchased on both a recourse and non-recourse basis depending on the credit worthiness of the Customers or the debtors.
A strategy has been identified in which multinational corporations use the Factoring of accounts receivable among related parties. The goal of this strategy is to avoid home taxation by shifting income offshore and to significantly reduce remaining U.S. income by deducting expenses related to the same income. Let us say A U.S. subsidiary (“Taxpayer”) of a foreign parent earns sales income and books accounts receivable. The Taxpayer then factors (sells at a discount) the accounts receivable to a brother-sister foreign affiliate. The Taxpayer pays the foreign factor the following fees: a discount; administration fees; commissions; and interest. The Taxpayer deducts these fees or may net them against gross receipts. However, the foreign factor does not perform any of the typical services of a factor, including collection of the Taxpayer’s accounts receivable. Instead, the Taxpayer agrees to continue doing all or most of its own collection work on its accounts receivable. In some cases, factoring arrangements involve the use of a domestic (Home based) factor instead of a factor located offshore. If the transaction is between two domestic entities it may be structured for state tax purposes and has no federal tax effect. In addition, in some cases, the Taxpayer and factor may be engaged in a financing arrangement involving securitizing the accounts receivable.
Common Check necessary for Factoring:1. Check the status of Customer for Factoring:
The data required to check the status will be maintained in the Customers Master. The field Accounts Receivable Pledging Indicator (ARPI) in the customer master, will indicate the status of the customer
2. Check if the total open amount greather than the accepted limit:
Here a check is sometimes done to ensure that the minimum due amount meets the requisite criteria prescribed bt the Factor.
3. Check the maximum allowed overdue days for the company code.
If the customer has at least one open accounting document with weighed days overdue greather than the maximum allowed overdue days of the company code, the customer is not factorable for this company code. This creiteia will not be met in the event the Customer has invoice with a weighed due date that is greather than the maximum allowed due date .
4. Check if the credit limit for the country has not been reached:
The Factor sometimes sets a limit for the amount of liability to be taken per country. during the Factoring process this needs to be checked.
5. Check if the customer credit limit has not been reached:
The Factor basis Insurance limits, decides the credit limit to be given per customer.
6.Check if the customer group credit limit has not been reached:
Check if the document will not exceed the customer group credit limit when factored. This is because Factors sometimes look at a customers credit limit with a Group perspective.
A factor may provide any of the following services:
1. Investigation of the credit risk of customers of the client;
2. Assumption of the credit risk of customers;
3. Collection of the client’s accounts receivable from customers;
4. Bookkeeping and reporting services related to accounts receivable;
5. Provision of expertise related to disputes, returns and adjustments;
6. Advancing or financing
Factoring is a well known best method of increasing and fixing cash flows. When you factor you are able to sell your receivables for what they're worth and get cash for them right now instead of waiting 30-120 days for your clients to pay you. Once a company enhances its cash flows it can pay off debt, make payroll, pay for overhead and other costs where before Factoring many businesses are crippled due to a poor quality cash flow.
Factoring's origins lie in the financing of trade, particularly international trade. Factoring as a fact of business life was underway in England prior to 1400. It appears to be closely related to early merchant banking activities. The latter evolved by extension to non-trade related financing such as sovereign debt. Like all financial instruments, factoring evolved over centuries. This was driven by changes in the organization of companies; technology, etc.
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.
Factoring Account Receivables is a tool that has been in use for many years. Several Fortune 500 companies use this financial tool every day. These Include IBM, Coca-Cola, Wal-Mart, Georgia-Pacific, Honeywell, Scott Paper, and Shell Oil. There are numerous types of factoring arrangements. Some of the basic types vary the treatment of credit risk assumption and customer or debtor notification. When the factoring agreement involves the purchase of accounts receivable where the factor bears the risk of a customer or debtor failing to pay the client for reason of financial inability it is a non-recourse or without-recourse agreement. In the situation where the client must bear the risk of nonpayment due to financial inability, the agreement is a recourse agreement. In many instances, factoring agreements provide for accounts to be purchased on both a recourse and non-recourse basis depending on the credit worthiness of the Customers or the debtors.
A strategy has been identified in which multinational corporations use the Factoring of accounts receivable among related parties. The goal of this strategy is to avoid home taxation by shifting income offshore and to significantly reduce remaining U.S. income by deducting expenses related to the same income. Let us say A U.S. subsidiary (“Taxpayer”) of a foreign parent earns sales income and books accounts receivable. The Taxpayer then factors (sells at a discount) the accounts receivable to a brother-sister foreign affiliate. The Taxpayer pays the foreign factor the following fees: a discount; administration fees; commissions; and interest. The Taxpayer deducts these fees or may net them against gross receipts. However, the foreign factor does not perform any of the typical services of a factor, including collection of the Taxpayer’s accounts receivable. Instead, the Taxpayer agrees to continue doing all or most of its own collection work on its accounts receivable. In some cases, factoring arrangements involve the use of a domestic (Home based) factor instead of a factor located offshore. If the transaction is between two domestic entities it may be structured for state tax purposes and has no federal tax effect. In addition, in some cases, the Taxpayer and factor may be engaged in a financing arrangement involving securitizing the accounts receivable.
Common Check necessary for Factoring:1. Check the status of Customer for Factoring:
The data required to check the status will be maintained in the Customers Master. The field Accounts Receivable Pledging Indicator (ARPI) in the customer master, will indicate the status of the customer
2. Check if the total open amount greather than the accepted limit:
Here a check is sometimes done to ensure that the minimum due amount meets the requisite criteria prescribed bt the Factor.
3. Check the maximum allowed overdue days for the company code.
If the customer has at least one open accounting document with weighed days overdue greather than the maximum allowed overdue days of the company code, the customer is not factorable for this company code. This creiteia will not be met in the event the Customer has invoice with a weighed due date that is greather than the maximum allowed due date .
4. Check if the credit limit for the country has not been reached:
The Factor sometimes sets a limit for the amount of liability to be taken per country. during the Factoring process this needs to be checked.
5. Check if the customer credit limit has not been reached:
The Factor basis Insurance limits, decides the credit limit to be given per customer.
6.Check if the customer group credit limit has not been reached:
Check if the document will not exceed the customer group credit limit when factored. This is because Factors sometimes look at a customers credit limit with a Group perspective.
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