costs of credit management which are transferred to the factor. However, the factor takes up risks in debts (of default) which previously were supposed to be borne by the sellingcompany. Reasons why factoring is not popular in Kenya (disadvantages ) 1. Most transactions in Kenya are strictly on cash basis, due to low creditability of most of the small firms inKenya. 2. It is costly source of finance because the discount rate may even be higher thank bank rates, thus companies may prefer to use overdraft finance than factoring. 3. After selling a debtor, chances are that one might lose such a customer completely and such this method can be used by monopoliesonly. 4. Sale of debtors reduces the company’s liquidity position in a way and this may not be preferred by companies which depend on trade credit as their liability rates will not be acceptable to tradecreditors.
5. There is ignorance amongst the business community in Kenya about the use of this facility as a source offinance. 6. It is difficult to legally enforce collection of debtors in Kenya and this may discourage would befactors. 7. Kenya’s money market is not fully developed and as such the factor may find it difficult to liquidate these debtors or pass the title in this asset to another party. 8. Trade credit is very popular in Kenya and this has made up forfactoring. Advantages of using Factoring 1. The selling company can obtain ready finance from the factor which can be used to solve its liquidityproblems. 2. the selling company transfers the risk of bad debts to the factor company thus reducing its losses 3. It minimizes the burden of collecting debtors’ i.e debt collectionexpenses. 4. this finance can be raised fast thus does not entail a lot offormalities 5. It does not carry collateral security thus a flexible source of finance toraise. 6. it can be raised by any company regardless of its status as long as it has good debtors i.e of reputablecompanies. 7. it does not affect the company’s gearing level thus no loss of control to the company by itsuse. Trade Debtors This acts as a source of finance in such as the company holding; such debtors can discount them with a bank and obtain immediate finance. They can be used as security for loans in particular overdrafts. The company can continue to sell on credit and as such this source can be a semi – permanent source of finance. Accrued Expenses Examples of these are; i) accrued electricitybills ii) accrued telephonebills iii) accrued waterbills iv) accruedrent v) Accrued rates. These are a short-term source of finance and can be big sources if the company has a number of these outstanding expenses. However, a company should use these in as much as they cannot affect its future operations and only pay such on the last date when these aredue. Credit Card buying (plastic money) These are arrangements whereby a company or an individual enters into an agreement with a credit card organization to use their card to purchase a number of goods and
services and pay after agreed period of time. Usually repayment carries interest charges.
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- Fall '19