Question

A firm does not have resources to collect on its accounts receivables and needs cash to run its business. Which method of short-term financing (pledging or factoring accounts receivables) would you recommend and why?

Answer 1

A firm does not have resources to collect on its accounts receivables and needs cash to run its business. Which method of short-term financing (pledging or factoring accounts receivables) would you recommend and why?

Financing / Fund raising has different channels to opt for for any business , depending on its requirements, urgency, its fund raising capacity etc.

Short term financing can be availed thru pledging of the accounts receivables with a financial institution and can get money to the extent of amount after considering risk factor (it ranges from either 75% - 80% of accounts receivables can be offered as financing); However, this short term financing can be taken only if the company has potential chances to pay off the debt and its interest payments as well. Also, the procedure for availing short term financing is a bit time consuming as it involves credt appraisals, business projections etc.

Factoring: This is a process introduced to mitigate the operational difficulties being faced in the above. Factoring is a financial service in which a business sell its accounts receivables to the Factoring agent at the discounted price. This shall give immediate funding to the company and it is the now with the factoring agent to collect and make money out of the accounts receivables. This is the quickest possible way of working capital financing, ofcourse,with some cost factor.

In the given case, since the firm doesnt have the resources to collect from its accounts receivables and is in need ot money for its operations, it is preferred to go for Factoring.