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Factoring involves selling owed money to a third party, who pays a portion of the money and collects the debt from the customer. Negotiating a deal involves balancing payment and terms, with recourse agreements allowing companies to retain some risk. Other negotiating areas include the level of detail provided about debtors and controls on debt collection.
A factoring arrangement involves selling the rights to money that are owed by customers to a third party. Such an arrangement may be described as a loan or as the sale of an asset, depending on the specific details agreed upon. The main goal of negotiating a deal is to strike the right balance between getting the highest possible payment for the money you’re owed and getting the terms of the deal that meet your particular needs.
The principle of a factoring arrangement is always the same: a third party, especially a finance company, pays the company a portion of the money it is owed, then collects the debt from the customer and keeps the proceeds. The difference between what the firm receives and what the customer owes is the finance company’s profit. The business will normally consider this a price worth paying to have immediate access to cash and thus improve cash flow. In general, the more elements of the arrangement that favor the finance company, the higher the percentage of debt the business should receive.
One area where a company may be able to negotiate a better deal is with a recourse agreement. With this arrangement, the company retains part of the risk. For example, the finance company may agree to repurchase debt for as little as 90 days, after which the business must repay any outstanding amounts or negotiate a new deal. A business that accepts a recourse arrangement typically requires a higher proportion of the debt to reflect this added risk. It could also negotiate the length of time over which the finance company has to pay off the debt.
A variant of a with recourse factoring arrangement has the finance company pay only a portion of the money up front. The finance company will then deliver the rest of the company’s share of the money when and if it collects the money from the debtor. This is a less favorable deal for the company, so the precise proportions of the two payments it will receive could be a negotiating point.
Not all areas of negotiating a factoring deal involve financial breakdown. A negotiating area is the amount of detail the business has to provide about its debtors, which the finance company can use to determine the proportion it keeps. Another point is whether there are controls on how the finance company behaves in trying to collect the debt: a company may want to take special steps to avoid upsetting customers.
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