Credit control methods

Question 1

Invoice discounting

Answer 1

1)This is a sale of a business’ invoices to an invoice discounting company( purchase of invoices from a company)
the discounting company doesn’t take over the collection of the debts
2) Method of raising cash : The cash is received On the invoice is as it is raised rather than waiting for the customer to pay

Question 2

Advantages of invoice discounting

Answer 2

1) Simple and flexible
2) Can be used when short term funds are needed - improving liquidity
3) The Customer does not need to know of the invoice discounting arrangement
4) The business receives cash sooner

Question 3

Invoice discounting
method

Answer 3

A business lends money to a customer based on a discounted value of me invoices that customer has issued

Question 4

The purpose of credit insurance is to allow a business
to:

Answer 4

Claim back amounts owed to it by customers who have defaulted

Question 5

Forms of Credit insurance

Answer 5

1) Whole Revenue
a) Total receivables covered for around 80 % of their value
b) Around 80% of trade receivables are covered for the full amount they owe
2) Datum line
3) Catastrophe
4) Specific amount

Question 6

What is datum line ? (Annual aggregate excess policy )

Answer 6

Where irrecoverable debts are insured in total for customers with balances above a fixed limit

Question 7

What is Catastrophe credit insurance ?

Answer 7

It is suitable for larger companies ( usually with turnover over 10 million ) who need to prepare for severe losses of debt that
exceed their normal irrecoverable debt levels

Question 8

What is specific amount - Creditinsurance ?

Answer 8

This insurance against certain named customers

Question 9

Factoring without recourse

Answer 9

This means if a customer turns bad and never pays , the factoring company bears the cost of this bad debt. charges will be higher than they would be with recourse

Question 10

Administration of the sales ledger

Answer 10

This includes the assessment and granting of credit as well the administration and collection of receivables. Charges will be made at a percentage of revenue

Question 11

Benefits of offering settlement discounts to the customers

Answer 11

1) Attract customers
2) Receive cash sooner
3) Reduce irrecoverable debt risk

Question 12

Drawbacks of offering settlement discounts to
the customers

Answer 12

1) Expensive
2) Admin burden
3) If deadline for discount is missed, it may take longer than normal to pay

Question 13

3 main services provided by a factoring service ?

Answer 13

1) Receivables ledger adminstation
2) Provision of finance
3) Instance against irrecoverable receivables

Question 14

What is factoring without recourse?

Answer 14

The factor bears the risk of any trade receivables that do not pay
It is more expensive as the risk for the factor is higher

Question 15

What is factoring with recourse ?

Answer 15

The customer will have to repay to the factor any monies advanced for the debt that is irrecoverable

Question 16

The debt factoring procedure

Answer 16

1) The company sells goods to the customer payable in 30 days
2) The company sells the debt to the factor
3) The company pays the factor after 30days
4) The factor pays the company less an administration fee

Question 17

Advantages of debt factoring

Answer 17

1) No credit control staff to employ them
2) Benefit of economics of scale: such as organisation and the factor’s fee reduced
3) The cash flow advantages

Question 18

Disadvantages of debt factoring

Answer 18

1) Control of trade receivables- displease customers
2) May give impressions, the company is having liquidity problems

Question 19

The invoice discounting procedure

Answer 19

1) The company sells goods to the customer so days payable in 30 days
2) The company borrows up to 80% of the value of debt
3) The company receives payment
4) The company pays the invoice discounter the amount borrowed plus interest

Question 20

Irrecoverable bad debts

Answer 20

1) The debt is more than 6 months and less than four years 6 months overdue And
2) The debt has been mitte off in the books and
3) The debt hasn’t bew sold to a factoring company and
4) The VAT has been paid to HMRC

Question 21

Features of recourse of factoring

Answer 21

1) Taking over the administration of the trade payables
2) Lending a percentage of the outstanding invoices as soon as they are issued
3) Paying the balance ( less charge) of an invoice once a customer settles the debt

Question 22

Credit control procedures must be followed at all times which
include :

Answer 22

1) Ensuring that up to date financial information is analysed before any increase in credit can be allowed
2) Seeking references before granting credit
3) Chasing outstanding debts on time
4) Reporting any potential problems to the appropriate manager

Question 23

Whole turnover - credit insurance

Answer 23

The insurance against debts from any customer and for any
amount

Question 24

Single account - Credit insurance

Answer 24

The insurance is against one particular customer

Question 25

Key accounts- Credit insurance

Answer 25

The insurance is here than one selected customer account

Question 26

Debt factor to the business - Correct order

Answer 26

1) A business sends an invoice to the customer
2) The factor sends cash to the business
3) The factoring company chases the outstanding debt
4) The customer pays the factoring company
5) The balance on the debt is paid to the business by a
factor less any fees owing

Question 27

The business uses invoice discounter - Correct order

Answer 27

1)The business sends the invoice to the customer
2) The discounter sends cash to the business
3) The business chases th e outstanding debt
4) The customer pays the business
5) The business pays the discounter what was advanced plus
fees

Question 28

The debt collection policy - Steps

Answer 28

1) Issue invoice
2) Sent statement
3) Telephone call
4) Reminder letter
5) Customer on stop
6) Legal action letter
7 Provision for doubtful debt
8) Start legal action
9) Irrecoverable debt

Question 29

Bankruptcy -order of distributions

Answer 29

1) Fixed charge holders
2) Fees and charges of the bankruptcy or liquidation process
3) Preferential creditors
4) Floating charge holders ( companies only)
5) Unsecured creditors
6) The bankrupt or Company shareholders

Question 30

Invoice discounting

Answer 30

Selling an invoice to another company but
maintaining the collection of the debt
yourself.

Question 31

Without recourse debt factoring

Answer 31

Selling all the debts to another company
who will provide an advance payment for
the debt. If the customer defaults the
then the advance payment does not need
to be returned

Question 32

With recourse debt factoring

Answer 32

Selling all the debts to another company
who will provide an advance payment for
the debt. If the customer defaults, then
the advance payment must be returned