Receivables financing: You havemore options, but costs are up.
Now you can borrow on purchase orders as well as receivables
Youíve got more options than ever to convert receivables into cash. But you should consider those options carefully, says Bruce Barren, who advises mid-market firms on capital formation. Costs are up. And lenders want more guarantees, There are three types of receivables financing: factoring the receivables by selling them at a discount to a factor borrowing on the receivables by pledging them to a lender, or prior to the actual creation of the receivable, using the purchase order and underlying inventory as collateral on a loan. These days factoring is almost always "with recourse," meaning that if the receivable becomes uncollectible, youíll have to make good. In essence, you guarantee collection. So it may not be as good a deal as it used to be. Factors also often wonít take receivables from companies with too many trade discounts, merchandise returns or concentrations in certain accounts (like the U.S. government). And if a factor does take the risk, it will often demand additional collateral such as personal guarantees or additional pledged assets.
If you donít use a factor
CFO & Controller Alert
April 13, 1999