Friday, February 6, 2009

Disposing of Receivables

 What is Disposing of Receivables?

Companies can convert receivables to cash before they are from debtors to raise cash quickly if needed. This can be accomplished by two main ways:

  1. Selling (Factoring) Receivables- The company can sell its accounts receivables to a finance company to get the cash instantly. The finance company will generally charge the seller a factoring fee and take ownership of the receivables. In this case, the finance company assumes the risk of bad debts that it takes over from the company. 
  2. Pledging Receivables- The company can also borrow money from a finance company or bank and pledge its receivables as security for the loan. Unlike factoring, this does not transfer risk of bad debts to the 3rd party. If the loan is not paid back the lender can take title to the receivables pledged. 

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