Where factoring is to be on a continuing basis the

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Unformatted text preview: ures for the purchase of an account. The factor, like a lender against a pledge of accounts receivable, chooses accounts for purchase, selecting only those that appear to be acceptable credit risks. Where factoring is to be on a continuing basis, the factor will actually make the firm’s credit decisions, because this will guarantee the acceptability of accounts.10 Factoring is normally done on a notification basis, and the factor receives payment of the account directly from the customer. In addition, most sales of accounts receivable to a factor are made on a nonrecourse basis. This means that the factor agrees to accept all credit risks. Thus, if a purchased account turns out to be uncollectible, the factor must absorb the loss. Typically, the factor is not required to pay the firm until the account is collected or until the last day of the credit period, whichever occurs first. The factor 10. The use of credit cards such as MasterCard, Visa, and Discover by consumers has some similarity to factoring, because the vendor that accepts the card is reimbursed at a discount for purchases made with the card. The difference between factoring and credit cards is that cards are nothing more than a line of credit extended by the issuer, which charges the vendors a fee for accepting the cards. In factoring, the factor does not analyze credit until after the sale has been made; in many cases (except when factoring is done on a continuing basis), the initial credit decision is the responsibility of the vendor, not the factor that purchases the account. CHAPTER 15 Current Liabilities Management 653 sets up an account similar to a bank deposit account for each customer. As payment is received or as due dates arrive, the factor deposits money into the seller’s account, from which the seller is free to make withdrawals as needed. In many cases, if the firm leaves the money in the account, a surplus will exist on which the factor will pay interest. In other instances, the factor may make advances to the firm against uncollected accounts that are not yet due. These advances rep...
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