There are different sources of finance such as debt, retained earnings, term loans, working capital loans, equity, letter of credit, debentures, euro issue, venture funding etc. These sources are useful in different situations. They are classified based on time period, ownership and control, and their source of generation.
Debt factoring is a financial arrangement by which a business sells its invoices to a third party at a discount. Businesses use debt factoring to improve their cashflow.
Releases immediate cash:
First and foremost, a debt factoring plan means that the business which delivered the goods or services receives the actual funds claimed with the invoiced almost immediately, regardless of the capacity of the end client to pay for the bill. Funds can be used to carry any necessary business operation instantly.
Saves time and resources
With a factoring plan, a company no longer needs to spend time and divert resources to the tedious, unpleasant and time-consuming tasks of invoice claiming and payment collection. Also, the cost of the factoring service may not be as high as one thinks, as the competition in this sector is quite frantic.
Frees ongoing working capital
Businesses which use factoring enjoy more flexibility. Direct access to invoiced funds make it possible to repay bank facilities and release previously pledged security.
Brings total peace of mind
If the factoring service plan includes bad debt protection (known as non-recourse factoring) that is, a true credit option, businesses will not even need to worry about their clients honouring their debts at all.
Loss of profit
It should be kept in mind that a debt factoring service comes at a price : usually, a perce...
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...er 's payment to a seller will be received on time and for the correct amount.
The terms of a letter of credit can specify that fax presentments are allowed and that the draw must be honored (or notice of dishonor given) within a few days or less.
By use of a letter of credit, the beneficiary is assured that the payment obligation is backed by credit of a bank which is substituted for or added to the credit of a corporate or individual applicant.
Standby LC 's are treated by issuers like loans – the applicant must be credit approved, set aside credit lines and frequently has to set aside collateral to secure its duty to reimburse the issuer if there is a draw on the LC.
Other forms of credit support may be less costly, such as a bond, export credit insurance, documentary collection, open account sales, a security interest in collateral, or a corporate guaranty.
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