We look at the following factoring information when we consider pricing your deal: Annual Sales Volume, Credit Worthiness of your clients, Average Invoice Size, Domestic or International and Payment Terms.A typical charge for a 30 day invoice will be 2% to 4%, 3% to 6% if the invoice is aged 60 days.
We want to charge you fair factoring fees and interest for our factoring services. Having been in business for over 30 years we can proudly say that the reason why we have been in business for this long is because we have treated clients fairly over the years.
We use the Prime Plus Method of factoring not the Discount Method of factoring. The Prime Plus Method is used by larger factoring financial services firms while the Discount Method is used by smaller factors.
Usually the Prime Plus Method produces lower rates to you than the Discount Method. When talking to other factors find out how they are charging you for their factoring services. Ask also if there are additional factoring fees if your receivable gets "old". We do not charge any additional fees if your receivable gets "old".
The Prime Plus Method has only two fees used by a factoring financial services firm. The first fee is a one-time fee per invoice called the Factoring Fee. Factoring fees are charged on the gross amount of the invoice. The second fee is the interest charge on the money advanced per invoice based on your advance rate. The interest charge begins on the day we advance your funds for that invoice. The interest charge is a percentage over the prime rate that has been agreed upon prior to signing our factoring agreement.
Example: Invoice Amount: $1000
What is the cost for a 45 day invoice for each method?
Prime Plus Method
Factor fee is $30 ($1000 x 3% the Factoring Fee)
Money Advanced $800 (1000 x 80% the advance rate)
$800 x 12% APR. x 45 days = $12.00 is the interest charge for $800 borrowed for 45days at 12% APR
Total Cost is $30 + $12 = $42
(Factoring Fee + Interest Charge)
$42 / $1000 = 4.2% is charged on the gross amount of the invoice of $1000
Discount Method
3% for the first 30 days is = $1000 x 3% = $30
1% for the next 10 days is = $1000 x 1% = $10
1% for the next 5 days is = $1000 is 1% = $10
The Total is $30 + $10 + 10 = $50
$50 / $1000 = 5% is charged on the gross amount of the invoice of $1000
As you can see the Prime Plus Method in this case gives a lower total fee than the Discount Method, 4.2% vs 5%.
Factoring
Factoring could be understood as account receivable financing. It is a type of commercial finance whereby an entity sells its accounts receivable at a discount.
The actual payment from their customers takes place on typical 30 to 90 days terms. Entities benefit from the acceleration of cash flow by obtaining cash from the factor equal to the face value of the sold account receivable, less a factor's fee.
There are usually three parties involved when an invoice is factored: Seller, Debtor and Factor.
Seller: Seller of the product or service who originates the invoice.
Debtor: Debtor is the customer of the Seller, the recipient of the invoice for products supplied or services rendered who promises to pay the balance within the agreed payment terms.
Factor: Factor is the factoring company.
Types of factoring:
Notified (full service factoring): With notified factoring, the debtors are aware of the factoring 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 (invoice finance): With invoice finance (confidential or non-notification factoring), the factoring is undisclosed, with the seller usually retaining the credit control function.
Recourse Factoring: Recourse factoring is the most common type of factoring transaction. It allows the factor to go back to the seller if payment is not received after a 90 day period. The credit risk does not transfer to the factor during the recourse factoring process. In the event of non-payment by the customer, the seller must buy back the invoice with another credit worthy invoice. Recourse factoring is 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 fully on the factor. If the debtor can not pay the invoice the factor cannot seek payment from the seller. The factor will only purchase solid credit worthy invoices and he will turn away average credit quality customers. The cost is typically higher with this type of factoring as the factor assumes a greater risk.
We Offer Money Now!
We are one of the best factoring companies in the world. We offer small, medium and large businesses money they can use now. We understand the entrepreneurial world, thus we are flexible and offer good service. We have quick, same-day funding, rapid credit approvals and fast answers to questions.
We offer money to improve and expand your business. We are one of the oldest factors with over 30 years of experience. Knowledgeable, professional, experienced collection staff, direct lenders. Credit and risk coverage from professional lenders. 24-hour response to your funding requests.
You'll have information on such topics as accounts receivable factoring, invoice factoring, domestic factoring, trade financing, purchase order financing and more!. Whether you're looking for accounts receivable factoring, invoice factoring or other funding or factoring services, you'll find what you need here!. That's because we are the expert!
Browse our site for more information or fill out a quick application for our review. From the quick application we will review your factoring needs. From this review, we'll give you quick quote. If you are interested further, we will ask you to send the documents for factoring. We'll review these documents and then give you a written no obligation quote.
Complete Document Listing
Comprehensive Factoring Application
Corporate or personal tax returns
Corporate or personal financial statements
Articles of incorporation, (if corporation)
Partnership agreement, (if partnership)
Current aging of accounts receivables
Current aging of accounts payable
Copies of any UCC filings if you presently have assigned your accounts receivable to another secured party.
What information do you need to provide to start factoring your receivables?
1) Fill out our Quick Application and let us review it. We will respond immediately.
2) After we respond and if your company is factorable, we will need specific documentation.
How long does it take to get funded?
After we review all the requested documents (which takes two to seven days) we will sign an agreement. Once the agreement is signed we ask you to submit documentation for credit checking your customers and verification of initial invoices that you wish to factor. Upon completion of the credit and verification funding will occur immediately.
If you have tax problems will we fund you?
We have funded companies with IRS or state tax liens. It depends on monthly volume in relation to the tax lien and if the government agency will work with us. After we complete our due diligence we will make every effort to satisfy your needs.
Your customer won't pay an invoice, what do we do?
We offer recourse lines of credit (your risk) and non-recourse lines of credit(factor risk with a credit line) accounts. If the account has a credit line (non-recourse) the receivable is at our risk and we will pay you for the uncollected payment. If the invoice does not have a credit line (recourse) you will have to purchase the invoice back.
Do we fund companies in bankruptcy?
With permission of the court we will consider funding a bankrupt company.
Do we notify your customer?
Yes. All invoices are stamped payable to us. Since factoring is now so common, almost all account debtors will work with you. Our staff acts as your collection team and we represent you with professionalism. Also, notification from a factor usually generates quicker payment since many factors report payment history to national credit reporting firms.
What is your cost to factor with us?
We treat each account individually. See "Fees" for an explanation on our pricing.
Factoring (finance)
From Wikipedia, the free encyclopedia
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Factoring is a financial transaction whereby a business sells its accounts receivable (i.e., invoices) at a discount. Factoring differs from a bank loan in three main ways. First, the emphasis is on the value of the receivables (essentially a financial asset)[1], not the firm’s credit worthiness. Secondly, factoring is not a loan – it is the purchase of a financial asset (the Receivable). Finally, a bank loan involves two parties whereas factoring involves three. Factoring is a word often misused synonymously with accounts receivable financing. In Europe the term Factoring typically mean accounts receivable financing. Here, the term factoring comes from American Accounting.
The three parties directly involved are: the one who sells the Receivable, the debtor, and the factor. The Receivable is essentially a financial asset associated with the debtor’s Liability to pay money owed to the seller (usually for work performed or goods sold). The seller then sells one or more of its invoices (the Receivables) at a discount to the third party, the specialized financial organization (aka the factor), to obtain cash. The sale of the Receivables essentially transfers ownership of the Receivables to the factor, indicating the factor obtains all of the rights and risks associated with the Receivables.[2] Accordingly, the factor obtains the right to receive the payments made by the debtor for the invoice amount and must bear the loss if the debtor does not pay the invoice amount. Usually, the debtor is notified of the sale of the receivable, and the factor bills the debtor and makes all collections. However, at times, the seller will collect the payments made by the debtor, and will remit them to the factor. The factor usually charges the seller a service charge, as well as interest based on how long the factor must wait to receive payments from the debtor. [3] The seller also estimates the amount that may not be collected due to non-payment, and makes accommodation for this when determining the amount that will be given to the seller. The factor's overall profit is the difference between the price it paid for the invoice and the money received from the debtor, less the amount lost due to non-payment.[2]
American Accounting considers the receivables sold when the buyer has "no recourse"[4], or when the financial transaction is substantially a transfer of all of the rights associated with the receivables and the seller's monetary Liability under any "recourse" provision is well established at the time of the sale.[5] Otherwise, the financial transaction is treated as a loan, with the receivables used as collateral.
Contents
1 Reason
2 Differences from bank loans
3 Invoice sellers
4 Factors
5 Invoice payers (debtors)
6 History
7 Publications
8 See also
9 External links
10 References
Reason
A company sells its invoices, even at a discount to their face value, when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank." In other words, it figures that the return on the proceeds will exceed the income on the receivables.
Some businesses find a large variability in the inflow of cash and revenue. As a result, it might need to maintain a large cash balance on hand to cover its current cash needs when the cash flow is low. With a large variability in cash flow, there will also be instances that the cash flow will provide more than enough cash to meet all current cash needs. Rather than maintain a large average cash balance to cover this variability in cash flow, the firm may find it may obtain a profit advantage by paying a finance charge when it runs into a low cash flow situation in order to reduce the amount of money that is not invested in some profit making venture. Companies with a low variability in cash flow do not need to maintain a large cash balance to cover the periods of time cash flow is relatively low. These companies will find it more costly (in terms of lost profit) to pay the finance charge, and will tend to act as the "customer's bank" instead.
Differences from bank loans
Factors make funds available, even when banks would not do so, because factors focus first on the credit worthiness of the debtor, the party who is obligated to pay the invoices for goods or services delivered by the seller. In contrast, the fundamental emphasis in a bank lending relationship is on the creditworthiness of the borrower, not that of its customers. While bank lending is cheaper than factoring, the key terms and conditions under which the small firm must operate differ significantly.
From a combined cost and availability of funds and services perspective, factoring creates wealth for some but not all small businesses. For small businesses, their choice is slowing their growth or the use of external funds beyond the banks. In choosing to use external funds beyond the banks the rapidly growing firm’s choice is between seeking venture capital (i.e., equity) or the lower cost of selling invoices to finance their growth. The latter is also easier to access and can be obtained in a matter of a week or two, whereas securing funds from venture capitalists can typically take up to six months. Factoring is also used as bridge financing while the firm pursues venture capital and in conjunction with venture capital to provide a lower average cost of funds than equity financing alone. Firms can also combine the three types of financing, angel/venture, factoring and bank line of credit to further reduce their total cost of funds whilst at the same time improving cash flow.
As with any technique, factoring solves some problems but not all. Businesses with a small spread between the revenue from a sale and the cost of a sale, should limit their use of factoring to sales above their breakeven sales level where the revenue less the direct cost of the sale plus the cost of factoring is positive.
While factoring is an attractive alternative to raising equity for small innovative fast-growing firms, the same financial technique can be used to turn around a fundamentally good business whose management has encountered a perfect storm or made significant business mistakes which have made it impossible for the firm to work within the constraints of their bank covenants. The value of using factoring for this purpose is that it provides management time to implement the changes required to turn the business around. The firm is paying to have the option of a future the owners control. The association of factoring with troubled situations accounts for the half truth of it being labeled 'last resort' financing. However, use of the technique when there is only a modest spread between the revenue from a sale and its cost is not advisable for turnarounds. Nor are turnarounds usually able to recreate wealth for the owners in this situation.
Large firms use the technique without any negative connotations to show cash on their balance sheet rather than an account receivable entry, money owed from their customers, particularly when these show payments being due for extended periods of time beyond the North American norm of 60 days or less.
Invoice sellers
The invoice seller presents recently generated invoices to the factor in exchange for a dollar amount that is less than the value of the invoice(s) by an agreed upon discount and a reserve. A reserve is a provision to cover short payments, payment of less than the full amount of the invoice by the debtor, or a payment received later than expected. The result is an initial payment followed by a second one equal to the amount of the reserve if the invoice is paid in full and on time or a credit to the account of the seller with the factor. In an ongoing relationship the invoice seller will get their funds one or two days after the factor receives the invoices. Astute invoice sellers can use a combination of techniques to cover the range of 1% to 5% plus cost of factoring for invoices paid within 50 to 60 days or more. In many industries, customers expect to pay a few percentage points higher to get flexible sales terms. In effect the customer is willing to pay the supplier to be their bank and reduce the equity the customer needs to run their business. To counter this it is a widespread practice to offer a prompt payment discount on the invoice. This is commonly set out on an invoice as an offer of a 2% discount for payment in ten days. {Few firms can be relied upon to systematically take the discount, particularly for low value invoices - under $100,000 - so cash inflow estimates are highly variable and thus not a reliable basis upon which to make commitments.} Invoice sellers can also seek a cash discount from a supplier of 2 % up to 10% (depending on the industry standard) in return for prompt payment. Large firms also use the technique of factoring at the end of reporting periods to ‘dress’ their balance sheet by showing cash instead of accounts receivable There are a number of varieties of factoring arrangements offered to invoice sellers depending upon their specific requirements. The basic ones are described under the heading Factors below.
Factors
When initially contacted by a prospective invoice seller, the factor first establishes whether or not a basic condition exists, does the potential debtor(s) have a history of paying their bills on time? That is, are they creditworthy? (A factor may actually obtain insurance against the debtor’s becoming bankrupt and thus the invoice not being paid.) The factor is willing to consider purchasing invoices from all the invoice seller’s creditworthy debtors. The classic arrangement which suits most small firms, particularly new ones, is full service factoring where the debtor is notified to pay the factor {notification} who also takes responsibility for collection of payments from the debtor and the risk of the debtor not paying in the event the debtor becomes insolvent, non recourse factoring. This traditional method of factoring puts the risk of non-payment 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 because the factor assumes a greater risk and provides credit checking and payment collection services as part of the overall package. For firms with formal management structures such as a Board of Directors (with outside members), and a Controller (with a professional designation), debtors may not be notified (i.e., non-notification factoring). The invoice seller may not retain the credit control function. If they do then it is likely that the factor will insist on recourse against the seller if the invoice is not paid after an agreed upon elapse of time, typically 60 or 90 days. In the event of non-payment by the customer, the seller must buy back the invoice with another credit worthy invoice. Recourse factoring is typically the lowest cost for the seller because they retain the bad debt risk, which makes the arrangement less risky for the factor.
Despite the fact that most large organizations have in place processes to deal with suppliers who use third party financing arrangements incorporating direct contact with them, many entrepreneurs remain very concerned about notification of their clients. It is a part of the invoice selling process that benefits from salesmanship on the part of the factor and their client in its conduct. Even so, in some industries there is a perception that a business that factors its debts is in financial distress.
Invoice payers (debtors)
Large firms and organizations such as governments usually have specialized processes to deal with one aspect of factoring, redirection of payment to the factor following receipt of notification from the third party (i.e., the factor) to whom they will make the payment. Many but not all in such organizations are knowledgeable about the use of factoring by small firms and clearly distinguish between its use by small rapidly growing firms and turnarounds.
Distinguishing between assignment of the responsibility to perform the work and the assignment of funds to the factor is central to the customer/debtor’s processes. Firms have purchased from a supplier for a reason and thus insist on that firm fulfilling the work commitment. Once the work has been performed however, it is a matter of indifference who is paid. For example, General Electric has clear processes to be followed which distinguish between their work and payment sensitivities. (GE is also very active in the factoring industry as a supplier of funds).
History
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.[6] It appears to be closely related to early merchant banking activities. The latter however evolved by extension to non-trade related financing such as sovereign debt. [7] Like all financial instruments, factoring evolved over centuries. This was driven by changes in the organization of companies; technology, particularly air travel and non-face to face communications technologies starting with the telegraph, followed by the telephone and then computers. These also drove and were driven by modifications of the common law framework in England and the United States.[8]
Governments were latecomers to the facilitation of trade financed by factors. English common law originally held that unless the debtor was notified, the assignment between the seller of invoices and the factor was not valid. The Canadian Federal Government legislation governing the assignment of moneys owed by it still reflects this stance as does provincial government legislation modelled after it. As late as the current century the courts have heard arguments that without notification of the debtor the assignment was not valid. In the United States it was only in 1949 that the majority of state governments had adopted a rule that the debtor did not have to be notified thus opening up the possibility of non notification factoring arrangements.[9]
Originally the industry took physical possession of the goods, provided cash advances to the producer, financed the credit extended to the buyer and insured the credit strength of the buyer.[10] In England the control over the trade thus btained resulted in an Act of Parliament in 1696 to mitigate the monopoly power of the factors.[11] With the development of larger firms who built their own sales forces, distribution channels, and knowledge of the financial strength of their customers, the needs for factoring services were reshaped and the industry became more
specialized.
By the twentieth century in the United States factoring became the predominant form of financing working capital for the then high growth rate textile industry. In part this occurred because of the structure of the US banking system with its myriad of small banks and consequent limitations on the amount that could be advanced prudently by any one of them to a firm.[12] In Canada, with its national banks the limitations were far less restrictive and thus factoring did not develop as widely as in the US. Even then factoring also became the dominant form of financing in the Canadian textile industry.
Today factoring's rationale still includes the financial task of advancing funds to smaller rapidly growing firms who sell to larger more creditworthy organizations. While almost never taking possession of the goods sold, factors offer various combinations of money and supportive services when advancing funds.
Factors often provide their clients four key services: information on the creditworthiness of their prospective customers domestic and international; maintain the history of payments by customers (i.e., accounts receivable ledger); daily management reports on collections; and, make the actual collection calls. The outsourced credit function both extends the small firms effective addressable marketplace and insulates it from the survival-threatening destructive impact of a
bankruptcy or financial difficulty of a major customer. A second key service is the operation of the accounts receivable function. The services eliminate the need and cost for permanent skilled staff found within large firms. Although today even they are oursourcing such backoffice functions. More importantly, the services insure the entrepreneurs and owners against a major source of a liquidity crises and their equity.
In the latter half of the twentieth century the introduction of computers eased the accounting burdens of factors and then small firms. The same occurred for their ability to obtain information about debtor’s creditworthiness. Introduction of the Internet and the web has accelerated the process while reducing costs.
Today credit information and insurance coverage is available any time of the day or night on-line. The web has also made it possible for factors and their clients to collaborate in realtime on collections. Acceptance of signed documents provided by facsimile as being legally binding has eliminated the need for physical delivery of “originals”, thereby reducing time delays for entrepreneurs.
By the first decade of the twenty first century a basic public policy rationale for factoring remains that the product is well suited to the demands of innovative rapidly growing firms critical to economic growth.[13] A second public policy rationale is allowing fundamentally good business to be spared the costly management time consuming trials and tribulations of bankruptcy protection for suppliers, employees and customers or to provide a source of funds during the process of restructuring the firm so that it can survive and grow.
The International Factoring Association's (IFA) goal is to assist the Factoring community by providing information, training, purchasing power and a resource for the Factoring community.
IFA Member Services
Mission Statement:
To disseminate information to the Factoring Community in regards to developments and changes in the factoring industry and to provide a forum for educational meetings and seminars.
Membership:
Membership is open to all banks and finance companies that perform financing or factoring through the purchase of invoices or other types of accounts receivable. To join the IFA, please download the membership application and submit it to the IFA via email at: info@factoring.org or fax at: 805-773-0021.
Factor Search:
This area is designed to let business that are seeking a factoring firm to e-mail specifics regarding their business to the factors. Only those factors that meet the business search criteria will be notified. Factor Search
Code of Ethics:
This document outlines the goals and objectives that all members of the International Factoring Association must adhere to. IFA Code of Ethics
Listserver:
To receive our newsletter and email of upcoming events, send email to: info@factoring.org , in the subject line state Subscribe IFA
Discussion Group:
For additional information please visit our Discussion Group
Job Board:
Allows Companies to post job openings and Candidates to post resumes and search for factoring job listings: Click Here: Job Board What is Factoring? (source: wisegeek)
Factoring goes by many names, including invoice discounting, receivables factoring and debtor financing. In simple terms, factoring is a practice wherein one company purchases a debt or invoice from another company. It refers to the acquisition of accounts receivable, which are discounted in order to allow the buyer to make a profit upon collection of monies owed. Factoring transfers ownership of such accounts to another party that then works vigorously to collect the debt.
While factoring may allow the liable party to be relieved of the debt for less than the full amount, it is generally designed to be more beneficial to the factor, or new owner, and the seller of the account than to the debtor. The seller receives working capital, while the buyer is able to make a profit by buying the account for substantially less than what it is worth and then collecting on it. Factoring allows a buyer to purchase such accounts for about 25% less than what they are
actually worth.
The factor takes full responsibility for collecting the debt. The factor is required to pay additional fees, usually a small percentage, once collection efforts prove successful. The new owner of the account may offer the liable person or entity a small discount on the outstanding debt. Other arrangements are sometimes made, in which the debt is considered paid in full if a lump sum payoff is made under certain terms and conditions. Unfortunately, in some cases, factoring can cause the consumer or indebted company a great deal of financial stress, such as in the case of debt consolidation.
For example, if a person joins a debt consolidation program and one creditor engages in factoring, then the entity that purchases the account may not be bound by the program's contract with the original creditor. The factor may demand a large sum to consider the account current, and may increase interest rates as well as the monthly payment amount. This form of factoring may prove profitable in some cases, but in others it may backfire. The debtor may have no choice but to file for bankruptcy because he or she simply cannot afford the inflated interest rates and payment amounts. In the majority of cases, factoring is a profitable venture, but it is a good idea to review each account on an individual basis before deciding how to proceed.
Accounts receivable (A/R) 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. In most business entities this is typically done by generating an invoice and mailing or electronically delivering it to the customer, who in turn must pay it within an established timeframe called credit or payment terms.
An example of a common payment term is Net 30, meaning payment is due in the amount of the invoice 30 days from the date of invoice. Other common payment terms include Net 45 and Net 60 but could in reality be for any time period agreed upon by the vendor and client.
While booking a receivable is accomplished by a simple accounting transaction, the process of maintaining and collecting payments on the accounts receivable subsidiary account balances can be a full time proposition. Depending on the industry in practice, accounts receivable payments can be received up to 10 - 15 days after the due date has been reached. These types of payment practices are sometimes developed by industry standards, corporate policy, or because of the financial condition of the client.
On a company's balance sheet, accounts receivable is the amount that customers owe to that company. Sometimes called trade receivables, they are classified as current assets. To record a journal entry for a sale on account, one must debit a receivable and credit a revenue account. When the customer pays off their accounts, one debits cash and credits the receivable in the journal entry. The ending balance on the trial balance sheet for accounts receivable is always debit.
Business organizations which have become too large to perform such tasks by hand (or small ones that could but prefer not to do them by hand) will generally use accounting software on a computer to perform this task.
Associated accounting issues include recognizing accounts receivable, valuing accounts receivable, and disposing of accounts receivable.
Accounts receivable departments use the sales ledger. Accounts receivable is more commonly known as Credit Control in the UK, where most companies have a credit control department.
Other types of accounting transactions include accounts payable, payroll, and trial balance.
Since not all customer debts will be collected, businesses typically record an allowance for bad debts which is subtracted from total accounts receivable. When accounts receivable are not paid, some companies turn them over to third party collection agencies or collection attorneys who will attempt to recover the debt via negotiating payment plans, settlement offers or legal action. Outstanding advances are part of accounts receivables if a company gets an order from its customers with payment terms agreed in advance. Since no billing is being done to claim the advances several times this area of collectible is not reflected in accounts receivables. Ideally, since advance payment is mutually agreed term, it is the responsibility of the accounts department to take out periodically the statement showing advance collectible and should be provided to sales & marketing for collection of advances. The payment of accounts receivable can be protected either by a letter of credit or by Trade Credit Insurance.
Companies can use their accounts receivable as collateral when obtaining a loan (asset-based lending) or sell them through factoring (finance). Pools or portfolios of accounts receivable can be sold in the capital markets through a securitization.
Bookkeeping for Accounts Receivable
Companies have two methods available to them for measuring the net value of account receivables, which is computed by subtracting the balance of an allowance account from the accounts receivable account.
The first method is the allowance method, which establishes a liability account, allowance for doubtful accounts, or bad debt provision, that has the effect of reducing the balance for accounts receivable. The amount of the bad debt provision can be computed in two ways - either by reviewing each individual debt and deciding whether it is doubtful (a specific provision) or by providing for a fixed percentage, say 2%, of total debtors (a general provision). The change in the bad debt provision from year to year is posted to the bad debt expense account in the income statement.
The second method, known as the direct write-off method, is simpler than the allowance method in that it allows for one simple entry to reduce accounts receivable to its net realizable value. The entry would consist of debiting a bad debt expense account and crediting the respective account receivable in the sales ledger.
The two methods are not mutually exclusive, and some businesses will have a provision for doubtful debts and will also write off specific debts that they know to be bad (for example, if the debtor has gone into liquidation.)
For tax reporting purposes, a general provision for bad debts is not an allowable deduction from profit [1] - a business can only get relief for specific debtors that have gone bad. However, for financial reporting purposes, companies may choose to have a general provision against bad debts in line with their past experience of customer payments in order to avoid over stating debtors in the balance sheet. Source: Wikipedia
An invoice or bill is a commercial document issued by a seller to the buyer, indicating the products, quantities, and agreed prices for products or services the seller has provided the buyer. An invoice indicates the buyer must pay the seller, according to the payment terms.
From the point of view of a seller, an invoice is a sales invoice. From the point of view of a buyer, an invoice is a purchase invoice. The document indicates the buyer and seller, but the term invoice indicates money is owed or owing. In English, the context of the term invoice is usually used to clarify its meaning, such as "We sent them an invoice" (they owe us money) or "We received an invoice from them" (we owe them money).
Contents
1 Basic invoice
2 Variations
2.1 Utility bills
3 Electronic invoices
3.1 EDIFACT
3.2 UBL
4 Payment for invoices
5 See also
6 References
Basic invoice
I N V O I C E
RES Corporation
Marcos Highway
Cainta, Rizal
Sold to:
Avelino S. San Juan
Hyundai Motors Km. 114 Maharlika Highway, Cabanatuan City
Nueva Ecija Ship to:
Zenith Company Warehouse
12 Cobbler Street
Quezon City
Invoice No. 321586 Date and Time Nov. 20, 2008 Purchase Order : 6134 Shipped Shipper Terms
777 11/17/06 6895 11/17/06 Jones Truck Co. Net 15
Quantity Description Price Each Amount
15 sets Model S irons 60.00 900.00
50 doz X3Y Shur-par golf balls 7.00 350.00
Invoice Total $1,250.00
A typical invoice contains[1]
The word "invoice"
A unique reference number (in case of correspondence about the invoice)
Date of the invoice
Name and contact details of the seller
Tax or company registration details of seller (if relevant)
Name and contact details of the buyer
Date that the product was sent or delivered
Purchase order number (or similar tracking numbers requested by the buyer to be mentioned on the invoice)
Description of the product(s)
Unit price(s) of the product(s) (if relevant)
Total amount charged (optionally with breakdown of taxes, if relevant)
Payment terms (including method of payment, date of payment, and details about charges late payment)
The US Defense Logistics Agency requires an employer identification number on invoices.[2]
The European Union requires a VAT (value added tax) identification number on invoices between entities registered for VAT[3]. If seller and buyer belong to two different EU countries, both VAT identification numbers must be on the invoice in order to claim VAT exemption (VAT exemption according to directive 77/388/CEE of 17 May 1977). In the UK, if the issuing entity is not registered for VAT, the invoice must state that it is "not a VAT invoice".
Variations
There are different types of invoices:
Pro forma invoice - In foreign trade, a pro forma invoice is a document that states a commitment from the seller to provide specified goods to the buyer at specific prices. It is often used to declare value for customs. It is not a true invoice, because the seller does not record a pro forma invoice as an accounts receivable and the buyer does not record a pro forma invoice as an accounts payable. A pro forma invoice is not issued by the seller until the seller and buyer have agreed to the terms of the order. In few cases, pro forma invoice is issued for obtaining advance payments from buyer, either for start of production or for security of the goods produced.
Credit memo - If the buyer returns the product, the seller usually issues a credit memo for the same or lower amount than the invoice, and then refunds the money to the buyer, or the buyer can apply that credit memo to another invoice. Commercial invoice - a customs declaration form used in international trade that describes the parties involved in the shipping transaction, the goods being transported, and the value of the goods.[4] It is the primary document used by customs, and must meet specific customs requirements, such as the Harmonized System number and the country of manufacture. It is used to calculate tariffs.
Debit memo - When a company fails to pay or short-pays an invoice, it is common practice to issue a debit memo for the balance and any late fees owed. In function debit memos are identical to invoices.
Self-billing invoice - A self billing invoice is when the buyer issues the invoice to himself (e.g. according to the consumption levels he is taking out of a vendor-managed inventory stock).
Evaluated receipt settlement (ERS) - ERS is a process of paying for goods and services from a packing slip rather than from a separate invoice document. The payee uses data in the packing slip to apply the payments. "In an ERS transaction, the supplier ships goods based upon an Advance Shipping Notice (ASN), and the purchaser, upon receipt, confirms the existence of a corresponding purchase order or contract, verifies the identity and quantity of the goods, and then pays the supplier."[5]
Timesheet - Invoices for hourly services such as by lawyers and consultants often pull data from a timesheet.
Invoicing - The term invoicing is also used to refer to the act of delivering baggage to a flight company in an airport before taking a flight.
Statement - A periodic customer statement includes opening balance, invoices, payments, credit memos, debit memos, and ending balance for the customer's account during a specified period. A monthly statement can be used as a summary invoice to request a single payment for accrued monthly charges.
Progress billing used to obtain partial payment on extended contracts, particularly in the construction industry (see Schedule of values)
Collective Invoicing is also known as monthly invoicing in Japan. Japanese businesses tend to have many orders with small amounts because of the outsourcing system (Keiretsu), or of demands for less inventory control (Kanban). To save the administration work, invoicing is normally processed on monthly basis.
Utility bills
Bills from utility companies are based on measured (metered) use of electricity, natural gas or other utilities at a residence or business.[6][7] When an individual or business applies for service from the utility (opens an account), he signs an agreement (contract) to pay for his metered use of the utility.
Electronic invoices
Some invoices are no longer paper-based, but rather transmitted electronically over the Internet. It is still common for electronic remittance or invoicing to be printed in order to maintain paper records. Standards for electronic invoicing varies widely from country to country. Electronic Data Interchange (EDI) standards such as the United Nation's EDIFACT standard include message encoding guidelines for electronic invoices.
But the most common continues to be PDF over email.
EDIFACT
The United Nations standard for electronic invoices ("INVOIC") includes standard codes for transmitting header information (common to the entire invoice) and codes for transmitting details for each of the line items (products or services). The "INVOIC" standard can also be used to transmit credit and debit memos.[8] The "IFTMCS" standard is used to transmit freight invoices.[9]
UBL
Use of the XML message format for electronic invoices has begun in recent years. There are two standards currently being developed. One is the cross industry invoice under development by the United Nations standards body UNCEFACT and the other is UBL (Universal Business Language) which is issued by [Oasis]http://www.oasis-open.org. Implementations of invoices based on UBL are common, most importantly in the public sector in Denmark. Further implementations are under way in the Scandinavian countries as result of the NES (North European Subset) project http://www.nesubl.eu. Implementations are also underway in , Italy, Spain, Holland and with the European Commission itself.
The NES work has been transferred to [CEN]http://www.cen.eu, (the standards body of the European Union) workshop CEN/BII, for public procurement in Europe. The result of that work is a pre-condition for PEPPOL, pan European pilots for public procurement, financed by the European commission. There UBL procurement documents will be implemented in cross border pilots between European countries.
Agreement has been made between UBL and UN/CEFACT for convergence of the two XML messages standards with the objective of merging the two standards into one before end of 2009 including the provision of an upgrade path for implementations started in either standard.
Payment for invoices
Organizations purchasing goods and services usually have a process in place for approving payment on the invoice based on an employee's confirmation that the goods or services have been received.[10][11][12][13]
Credit risk is the risk of loss due to a debtor's non-payment of a loan or other line of credit (either the principal or interest (coupon) or both)
Contents
1 Faced by lenders to consumers
2 Faced by lenders to business
3 Faced by business
4 Faced by individuals
5 Counterparty risk
6 Sovereign risk
7 References
8 See also
8.1 Other types of risk
9 External links
Faced by lenders to consumers: Consumer credit risk
Most lenders employ their own models (credit scorecards) to rank potential and existing customers according to risk, and then apply appropriate strategies. With products such as unsecured personal loans or mortgages, lenders charge a higher price for higher risk customers and vice versa. With revolving products such as credit cards and overdrafts, risk is controlled through careful setting of credit limits. Some products also require security, most commonly in the form of property.
Faced by lenders to business
Lenders will trade off the cost/benefits of a loan according to its risks and the interest charged. But interest rates are not the only method to compensate for risk. Protective covenants are written into loan agreements that allow the lender some controls. These covenants may:
limit the borrower's ability to weaken their balance sheet voluntarily e.g., by buying back shares, or paying dividends, or borrowing further.
allow for monitoring the debt requiring audits, and monthly reports allow the lender to decide when he can recall the loan based on specific events or when financial ratios like debt/equity, or interest coverage deteriorate.
A recent innovation to protect lenders and bond holders from the danger of default are credit derivatives, most commonly in the form of a credit default swap.
These financial contracts allow companies to buy protection against defaults from a third party, the protection seller. The protection seller receives a periodic fee (the credit spread) as compensation for the risk it takes, and in return it agrees to buy the debt should a credit event ("default") occur.
Faced by business
Companies carry credit risk when, for example, they do not demand up-front cash payment for products or services.[1] By delivering the product or service first and billing the customer later - if it's a business customer the terms may be quoted as net 30 - the company is carrying a risk between the delivery and payment.
Significant resources and sophisticated programs are used to analyze and manage risk. Some companies run a credit risk department whose job is to assess the financial health of their customers, and extend credit (or not) accordingly. They may use in house programs to advise on avoiding, reducing and transferring risk. They also use third party provided intelligence. Companies like Standard & Poor's, Moody's and Dun and Bradstreet provide such information for a fee.
For example, a distributor selling its products to a troubled retailer may attempt to lessen credit risk by tightening payment terms to "net 15", or by actually selling fewer products on credit to the retailer, or even cutting off credit entirely, and demanding payment in advance. Such strategies impact sales volume but reduce exposure to credit risk and subsequent payment defaults.
Credit risk is not really manageable for very small companies (i.e., those with only one or two customers). This makes these companies very vulnerable to defaults, or even payment delays by their customers.
The use of a collection agency is not really a tool to manage credit risk; rather, it is an extreme measure closer to a write down in that the creditor expects a below-agreed return after the collection agency takes its share (if it is able to get anything at all).
Faced by individuals
Consumers may face credit risk in a direct form as depositors at banks or as investors/lenders. They may also face credit risk when entering into standard commercial transactions by providing a deposit to their counterparty, e.g., for a large purchase or a real estate rental. Employees of any firm also depend on the firm's ability to pay wages, and are exposed to the credit risk of their employer.
In some cases, governments recognize that an individual's capacity to evaluate credit risk may be limited, and the risk may reduce economic efficiency; governments may enact various legal measures or mechanisms with the intention of protecting consumers against some of these risks. Bank deposits, notably, are insured in many countries (to some maximum amount) for individuals, effectively limiting their credit risk to banks and increasing their willingness to use the banking system.
Counterparty risk
Counterparty risk, otherwise known as default risk, is the risk that an organization does not pay out on a credit derivative, credit default swap, credit insurance contract, or other trade or transaction when it is supposed to.[2] Even organizations who think that they have hedged their bets by buying credit insurance of some sort still face the risk that the insurer will be unable to pay, either due to temporary liquidity issues or longer term systemic issues.[3]
Large insurers are counterparties to many transactions, and thus this is the kind of risk that prompts financial regulators to act, e.g., the bailout of insurer AIG.
On the methodological side, counterparty risk can be affected by wrong way risk, namely the risk that different risk factors be correlated in the most harmful direction. Including correlation between the portfolio risk factors and the counterparty default into the methodology is not trivial, see for example Brigo and Pallavicini[4]
Sovereign risk
Sovereign risk is the risk of a government becoming unwilling or unable to meet its loan obligations, or reneging on loans it guarantees.[5] The existence of sovereign risk means that creditors should take a two-stage decision process when deciding to lend to a firm based in a foreign country. Firstly one should consider the sovereign risk quality of the country and then consider the firm's credit quality.[6]
Five macroeconomic variables that affect the probability of sovereign debt rescheduling are: [7]
Debt service ratio
Import ratio
Investment ratio
Variance of export revenue
Domestic money supply growth
The probability of rescheduling is an increasing function of debt service ratio, import ratio, variance of export revenue and domestic money supply growth. Frenkel, Karmann and Scholtens also argue that the likelihood of rescheduling is a decreasing function of investment ratio due to future economic productivity gains. Saunders argues that rescheduling can become more likely if the investment ratio rises as the foreign country could become less dependent on its external creditors and so be less concerned about receiving credit from these countries/investors.[8]
References
^ Principles for the management of credit risk from the Bank for International Settlement
^ Investopedia. Counterparty risk. Retrieved 2008-10-06
^ Tom Henderson. Counterparty Risk and the Subprime Fiasco. 2008-01-02. Retrieved 2008-10-06
^ Brigo, Damiano and Andrea Pallavicini (2007). Counterparty Risk under Correlation between Default and Interest Rates. In: Miller, J., Edelman, D., and Appleby, J. (Editors), Numerical Methods for Finance. Chapman Hall. ISBN 158488925X. Related SSRN Research Paper^ Country Risk and Foreign Direct Investment. Duncan H. Meldrum (1999)
^ Cary L. Cooper, Derek F. Channon (1998). The Concise Blackwell Encyclopedia of Management. ISBN 978-0631209119.
^ Frenkel, Karmann and Scholtens (2004). Sovereign Risk and Financial Crises. Springer. ISBN 978-3540222484.
^ Cornett, Marcia Millon and Saunders, Anthony (2006). Financial Institutions Management: A Risk Management Approach, 5th Edition. McGraw Hill. ISBN
978-0073046679.
Bluhm, Christian, Ludger Overbeck, and Christoph Wagner (2002). An Introduction to Credit Risk Modeling. Chapman & Hall/CRC. ISBN 978-1584883265.
Damiano Brigo and Massimo Masetti (2006). Risk Neutral Pricing of Counterparty Risk, in: Pykhtin, M. (Editor), Counterparty Credit Risk Modeling: Risk
Management, Pricing and Regulation. Risk Books. ISBN 1-904339-76-X.
de Servigny, Arnaud and Olivier Renault (2004). The Standard & Poor's Guide to Measuring and Managing Credit Risk. McGraw-Hill. ISBN 978-0071417556.
Darrell Duffie and Kenneth J. Singleton (2003). Credit Risk: Pricing, Measurement, and Management. Princeton University Press. ISBN 978-0691090467.
Invoice discounting is a form of short-term borrowing often used to improve a company's working capital and cash flow position.
Invoice discounting allows a business to draw money against its sales invoices before the customer has actually paid. To do this, the business borrows a percentage of the value of its sales ledger from a finance company, effectively using the unpaid sales invoices as collateral for the borrowing.
Although the end result is the same as for debt factoring (the business gets cash from its sales invoices earlier than it otherwise would) the financial arrangement is somewhat different.
Contents
1 Features of Invoice Discounting
2 Benefits
3 Drawbacks
4 See also
5 References
Features of Invoice Discounting
When a business enters into an invoice discounting arrangement, the finance company will allow the business to draw down a percentage of the outstanding sales invoices -usually in the region of 80%. As customers pay their invoices, and new sales invoices are raised, the amount available to be advanced will change so that the maximum drawdown remains at 80% of the sales ledger.[1]
The finance company will charge a monthly fee for the service, and interest on the amount borrowed against sales invoices. In addition, the finance company may refuse to lend against some invoices, for example if it believes the customer is a credit risk, sales to overseas companies, sales with very long credit terms, or very small value invoices. The lender will require a floating charge over the book debts (trade debtors) of the business as security for the funds it lends to the business under the invoice discounting arrangement.
Responsibility for raising sales invoices and for credit control stays with the business, and the finance company will often require regular reports on the sales ledger and the credit control process.
Benefits
By receiving cash as soon as a sales invoice is raised, the business will find that its cash flow and working capital position is improved.
The business will only pay interest on the funds that it borrows, in a similar way to an overdraft, which makes it more flexible than debt factoring.
Invoice financing can be arranged confidentially, so that customers and suppliers are unaware that the business is borrowing against sales invoices before payment is received.
Drawbacks
In some industries, financing debts can be associated with a company that is in financial distress. This can result in suppliers becoming reluctant to offer credit terms, which will reverse many of the benefits of the arrangement.
Invoice discounting is an expensive form of financing compared to an overdraft or bank loan.
As the finance company takes a legal charge over the sales ledger, the business has fewer assets available to use as collateral for other forms of lending - this may make taking out other loans more expensive or difficult.
Once a business enters into an invoice discounting arrangement, it can be difficult to leave as the business becomes reliant on the improved cash flow.
Factoring
Accounts receivable
References
^ Business Link. "Debt factoring and invoice discounting: the basics". Retrieved on 2008-11-01.
Retrieved from "http://en.wikipedia.org/wiki/Invoice_discounting"
Category: Financial services
In business and accounting, assets are everything of value that is owned by a person or company. The balance sheet of a firm records the monetary[1] value of the assets owned by the firm. The two major asset classes are tangible assets and intangible assets. Tangible assets contain various subclasses, including financial assets and fixed assets.[2] Financial assets include such items as accounts receivable, bonds, stocks and cash; while fixed assets include such items as buildings and equipment.[3] Intangible assets are nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place. Examples of intangible assets are goodwill, copyrights, trademarks, patents and computer programs.
Asset characteristics
Assets have three essential characteristics:
The probable future benefit involves a capacity, singly or in combination with other assets, in the case of profit oriented enterprises, to contribute directly or indirectly to future net cash flows, and, in the case of not-for-profit organizations, to provide services;
The entity can control access to the benefit;
The transaction or event giving rise to the entity's right to, or control of, the benefit has already occurred.
It is not necessary, in the financial accounting sense of the term, for control of assets to the benefit to be legally enforceable for a resource to be an asset,
provided the entity can control its use by other means.
It is important to understand that in an accounting sense an asset is not the same as ownership. In accounting, ownership is described by the term "equity," (see the related term shareholders' equity). Assets are equal to "equity" plus "liabilities."
The accounting equation relates assets, liabilities, and owner's equity:
Assets = Liabilities + Owners' Equity
The accounting equation is the mathematical structure of the balance sheet.
Assets are usually listed on the balance sheet. It has a normal balance, or usual balance, of debit (i.e., asset account amounts appear on the left side of a ledger).
Similarly, in economics an asset is any form in which wealth can be held.
Probably the most accepted accounting definition of asset is the one used by the International Accounting Standards Board [4]. The following is a quotation from the IFRS Framework: "An asset is a resource controlled by the enterprise as a result of past events and from which future economic benefits are expected to flow to the enterprise." [5]
Assets are formally controlled and managed within larger organizations via the use of asset tracking tools. These monitor the purchasing, upgrading, servicing, licensing, disposal etc., of both physical and non-physical assets.[clarification needed] In a company's balance sheet certain divisions are required by generally accepted accounting principles (GAAP), which vary from country to country.
Current assets
Main article: Current asset
Current assets are cash and other assets expected to be converted to cash, sold, or consumed either in a year or in the operating cycle. These assets are continually turned over in the course of a business during normal business activity. There are 5 major items included into current assets:
Cash and cash equivalents — it is the most liquid asset, which includes currency, deposit accounts, and negotiable instruments (e.g., money orders, cheque, bank drafts).
Short-term investments — include securities bought and held for sale in the near future to generate income on short-term price differences (trading securities).
Receivables — usually reported as net of allowance for uncollectable accounts.
Inventory — trading these assets is a normal business of a company. The inventory value reported on the balance sheet is usually the historical cost or fair market value, whichever is lower. This is known as the "lower of cost or market" rule.
Prepaid expenses — these are expenses paid in cash and recorded as assets before they are used or consumed (a common example is insurance). See also adjusting entries.
The phrase net current assets (also called working capital) is often used and refers to the total of current assets less the total of current liabilities.
Long-term investments
Often referred to simply as "investments". Long-term investments are to be held for many years and are not intended to be disposed in the near future. This group usually consists of four types of investments:
Investments in securities, such as bonds, common stock, or long-term notes.
Investments in fixed assets not used in operations (e.g., land held for sale).
Investments in special funds (e.g., sinking funds or pension funds).
Investments in subsidiaries or affiliated companies.
Different forms of insurance may also be treated as long term investments.
Fixed assets
Main article: Fixed asset
Also referred to as PPE (property, plant, and equipment), or tangible assets, these are purchased for continued and long-term use in earning profit in a business.
This group includes land, buildings, machinery, furniture, tools, and certain wasting resources e.g., timberland and minerals. They are written off against profits over their anticipated life by charging depreciation expenses (with exception of land). Accumulated depreciation is shown in the face of the balance sheet or in the notes.
These are also called capital assets in management accounting.
Intangible assets
Main article: Intangible asset
Intangible assets lack physical substance and usually are very hard to evaluate. They include patents, copyrights, franchises, goodwill, trademarks, trade names, etc. These assets are (according to US GAAP) amortized to expense over 5 to 40 years with the exception of goodwill. Tangible or intangible assets.