Credit control methods Flashcards
Invoice discounting
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
Advantages of invoice discounting
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
Invoice discounting
method
A business lends money to a customer based on a discounted value of me invoices that customer has issued
The purpose of credit insurance is to allow a business
to:
Claim back amounts owed to it by customers who have defaulted
Forms of Credit insurance
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
What is datum line ? (Annual aggregate excess policy )
Where irrecoverable debts are insured in total for customers with balances above a fixed limit
What is Catastrophe credit insurance ?
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
What is specific amount - Creditinsurance ?
This insurance against certain named customers
Factoring without recourse
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
Administration of the sales ledger
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
Benefits of offering settlement discounts to the customers
1) Attract customers
2) Receive cash sooner
3) Reduce irrecoverable debt risk
Drawbacks of offering settlement discounts to
the customers
1) Expensive
2) Admin burden
3) If deadline for discount is missed, it may take longer than normal to pay
3 main services provided by a factoring service ?
1) Receivables ledger adminstation
2) Provision of finance
3) Instance against irrecoverable receivables
What is factoring without recourse?
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
What is factoring with recourse ?
The customer will have to repay to the factor any monies advanced for the debt that is irrecoverable
The debt factoring procedure
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
Advantages of debt factoring
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
Disadvantages of debt factoring
1) Control of trade receivables- displease customers
2) May give impressions, the company is having liquidity problems
The invoice discounting procedure
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
Irrecoverable bad debts
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
Features of recourse of factoring
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
Credit control procedures must be followed at all times which
include :
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
Whole turnover - credit insurance
The insurance against debts from any customer and for any
amount
Single account - Credit insurance
The insurance is against one particular customer
Key accounts- Credit insurance
The insurance is here than one selected customer account
Debt factor to the business - Correct order
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
The business uses invoice discounter - Correct order
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
The debt collection policy - Steps
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
Bankruptcy -order of distributions
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
Invoice discounting
Selling an invoice to another company but
maintaining the collection of the debt
yourself.
Without recourse debt factoring
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
With recourse debt factoring
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
