Debt factoring takes place when a business sells its accounts receivable to a specialized finance company known as a factor. The receivables are sold at a discount and the factor has the responsibility of collecting the outstanding amounts. This is also referred to as accounts receivable financing or factoring.
This type of arrangement is used by many businesses to improve cash flow and shorten the cash cycle. The business receives immediate cash from the factor and does not have to handle the collections process. Before entering into a debt factoring agreement, there are several key advantages and disadvantages to consider.
The primary benefit of debt factoring is that it provides a quick method of financing. Instead of waiting to receive cash from customer accounts receivables, the factor pays the business immediately. This can be important if the business needs cash to pursue future growth or expansion. It can also be a viable alternative for business wary of taking on debt or issuing equity to raise capital.
Another key benefit is that cash flow is improved and the cash cycle is shortened. The amount of time it takes a business to turn cash to goods to cash is accelerated. This fast turnaround may allow the business to take on additional customers or purchase additional inventory.
Protection from bad debts is a potential benefit. This would only apply if the business has entered into a non-recourse factoring agreement. Under this type of agreement, the factor assumes the risk of bad debts. In other words, if a customer account cannot be collected, the factor must absorb the loss.
Cost effective collections is another potential benefit. The business does sell the accounts receivable at a discount, but it also hands off the entire process of accounts receivable collections. The business has effectively outsourced the process which can save valuable time or reduce the number of employees needed for back office work.
On the other side of the equation, debt factoring does carry a number of distinct disadvantages. The primary disadvantage is the cost. Under a factoring agreement, the factor purchases accounts receivable at a discount. Depending on the discount percentage, a factoring agreement may imply a higher cost of capital. This cost must be compared to the cost of other methods of financing which are available to the business.
A second disadvantage is that when a business works with a factor, they are introducing an outside influence into their business. Since the factor will be responsible for collecting accounts receivable and may be responsible for amounts which cannot be collected, they may try to influence sales practices. This can include attempts to influence sales policies and timing, as well as the customers that a business with deal with.
Bad debt liabilities are a potential disadvantage. This would be applicable if the business has entered into a resource factoring agreement. Under this type of arrangement, the business is responsible for any amounts that cannot be collected from customers. The discount rate at which the factor purchases the accounts is usually lower, but this must be considered in light of potential charges for uncollectible accounts.
Customer relations are a final potential disadvantage. Since a third party will now deal directly with customers to collect amounts owed, this can negatively impact their perception of the business. This is especially true if the factor engages in aggressive or unprofessional practices when collecting accounts.
Debt factoring represents a complex business agreement. It usually requires a long term contract and the modification of some current sales practices. When evaluating whether debt factoring is a good choice for a business, both advantages and disadvantages must be weighed to make an informed descision.
Showing posts with label Advantages. Show all posts
Showing posts with label Advantages. Show all posts
2008-12-08
Advantages and Disadvantages of Buying a Home Through a Lease Option
Advantages and Disadvantages of Buying a Home Through a Lease Option
Buying a home can be a satisfying or frustrating experience depending how financially ready you are to own a home. Just the process of buying a home can be very expensive with the major expense of purchasing a home being the down payment. The purpose of a down payment is to pay the bank fees to get the mortgage setup and generate some equity in the home to hedge the risk the bank is taking. In years past, this down payment could be very small, but with the fall of the housing market in 2006, those days are long gone, making it prohibitively expensive to buy a home. When there are fewer buyers and less credit around, sellers begin to offer other ways to sell their home. The "Lease Option" is one such method. A Lease Option is technically a lease (rental) with the option to purchase. You are renting the home but have the right to purchase the home at anytime during the rental period at a pre-determined price.
A lease option can be a very favorable way to purchase a home because it provides the advantages of home ownership without the disadvantages of ownership. The main advantages include: (1) No mortgage fees (2) less for a down payment (3) limited risk if the value of the home falls but you profit as the home appreciates. When structured property, there really are no disadvantages to a lease option relative to purchasing the home with a mortgage. When compared with renting, the major disadvantages of a lease option include: (1) pay more money upfront than renting (2) you are responsible for repairs, not the landlord. Each advantage and disadvantage is discussed in greater detail below.
1. Advantage: No mortgage fees. Because a lease option is technically a rental, the agreement is between you and the seller. Because the bank is not involved, there are no bank fees, meaning that you don't have to come up with the $5000 to $9000 that it costs to get a mortgage. However, eventually you will have to get a mortgage if you decide to stay in the home long term.
2. Advantage: Less for a down payment. Like the mortgage fees, because the agreement is between you and the seller, the money down is negotiable, and sometimes not required at all, though the amount down typically ranges between $5000 and $10000 dollars. This is still better than the bank will require.
3. Advantage: Limited risk and leveraged returns. A lease option is an option to purchase, not an obligation to purchase. This means that when the lease term expires, if the home has lost value, you can choose to walk away. You give up your down payment, but are not saddled with a home that cannot be sold. However, at the same time, if the home increases in value, because the purchase price is set, you can purchase the home for less than it is worth on the open market. This key element makes lease option homes potentially a great investment, because you can leverage your money with such little risk. For example. If you purchase a $300,000 home with a mortgage, you would need to bring about $20,000 at closing ($15,000 as a 5% down payment and $5000 to cover mortgage fees). If the home's value increased 5% over two years, the home would be worth $315,000. Your $20,000 turned into $30,000 ($15,000 in equity to start + $15,000 in appreciation); a 50% return on your money over 2 years. However, if the home decreased 5% in value, the home would be worth $285,000, and your $20,000 investment turned into $0.00. However, if the same home was bought as a lease option, then $5000 down would turn into $20,000 ($5000 in equity to start + $15,000 in appreciation); a 400% return on your money over 2 years. If the home decreased 5% in value, the home would be worth $285,000 but you can walk away having only paid the upfront down payment of $5000. In this example, the lease option reduced potential profits by 75% and increased potential returns by 350%.
5. Disadvantage: Pay more money upfront. Typically a lease option requires a greater amount of money upfront than renting. This is not always the case and depends on how desperate the seller is the lease the home. Generally you can expect to pay twice what you normally would put as a deposit on a comparable rental.
6. Disadvantage: Responsible for repairs. One nice thing about renting is that the landlord is responsible for repairs. In a typical lease option, you are entirely responsible for maintenance of a home.
There are both advantages and disadvantages to buying a lease option. When compared with the buying the home with a mortgage, there is really no disadvantage and when compared with renting, a lease option is a relative low risk investment for little additional out of pocket expense. The key, however, is in the terms of the agreement between you and the landlord. The terms are negotiable, so make sure you do so. To summarize, a lease option can be a win/win situation for both buyer and seller. If you are looking for a home but don't have enough for a regular down payment or are not sure if the market is going to get worse before better, consider a lease option and rest easy.
Buying a home can be a satisfying or frustrating experience depending how financially ready you are to own a home. Just the process of buying a home can be very expensive with the major expense of purchasing a home being the down payment. The purpose of a down payment is to pay the bank fees to get the mortgage setup and generate some equity in the home to hedge the risk the bank is taking. In years past, this down payment could be very small, but with the fall of the housing market in 2006, those days are long gone, making it prohibitively expensive to buy a home. When there are fewer buyers and less credit around, sellers begin to offer other ways to sell their home. The "Lease Option" is one such method. A Lease Option is technically a lease (rental) with the option to purchase. You are renting the home but have the right to purchase the home at anytime during the rental period at a pre-determined price.
A lease option can be a very favorable way to purchase a home because it provides the advantages of home ownership without the disadvantages of ownership. The main advantages include: (1) No mortgage fees (2) less for a down payment (3) limited risk if the value of the home falls but you profit as the home appreciates. When structured property, there really are no disadvantages to a lease option relative to purchasing the home with a mortgage. When compared with renting, the major disadvantages of a lease option include: (1) pay more money upfront than renting (2) you are responsible for repairs, not the landlord. Each advantage and disadvantage is discussed in greater detail below.
1. Advantage: No mortgage fees. Because a lease option is technically a rental, the agreement is between you and the seller. Because the bank is not involved, there are no bank fees, meaning that you don't have to come up with the $5000 to $9000 that it costs to get a mortgage. However, eventually you will have to get a mortgage if you decide to stay in the home long term.
2. Advantage: Less for a down payment. Like the mortgage fees, because the agreement is between you and the seller, the money down is negotiable, and sometimes not required at all, though the amount down typically ranges between $5000 and $10000 dollars. This is still better than the bank will require.
3. Advantage: Limited risk and leveraged returns. A lease option is an option to purchase, not an obligation to purchase. This means that when the lease term expires, if the home has lost value, you can choose to walk away. You give up your down payment, but are not saddled with a home that cannot be sold. However, at the same time, if the home increases in value, because the purchase price is set, you can purchase the home for less than it is worth on the open market. This key element makes lease option homes potentially a great investment, because you can leverage your money with such little risk. For example. If you purchase a $300,000 home with a mortgage, you would need to bring about $20,000 at closing ($15,000 as a 5% down payment and $5000 to cover mortgage fees). If the home's value increased 5% over two years, the home would be worth $315,000. Your $20,000 turned into $30,000 ($15,000 in equity to start + $15,000 in appreciation); a 50% return on your money over 2 years. However, if the home decreased 5% in value, the home would be worth $285,000, and your $20,000 investment turned into $0.00. However, if the same home was bought as a lease option, then $5000 down would turn into $20,000 ($5000 in equity to start + $15,000 in appreciation); a 400% return on your money over 2 years. If the home decreased 5% in value, the home would be worth $285,000 but you can walk away having only paid the upfront down payment of $5000. In this example, the lease option reduced potential profits by 75% and increased potential returns by 350%.
5. Disadvantage: Pay more money upfront. Typically a lease option requires a greater amount of money upfront than renting. This is not always the case and depends on how desperate the seller is the lease the home. Generally you can expect to pay twice what you normally would put as a deposit on a comparable rental.
6. Disadvantage: Responsible for repairs. One nice thing about renting is that the landlord is responsible for repairs. In a typical lease option, you are entirely responsible for maintenance of a home.
There are both advantages and disadvantages to buying a lease option. When compared with the buying the home with a mortgage, there is really no disadvantage and when compared with renting, a lease option is a relative low risk investment for little additional out of pocket expense. The key, however, is in the terms of the agreement between you and the landlord. The terms are negotiable, so make sure you do so. To summarize, a lease option can be a win/win situation for both buyer and seller. If you are looking for a home but don't have enough for a regular down payment or are not sure if the market is going to get worse before better, consider a lease option and rest easy.
2008-12-07
Advantages and Disadvantages of Adjustable Rate Mortgages
Advantages and Disadvantages of Adjustable Rate Mortgages
When consumers begin shopping for a home loan they are often presented with the option of using an adjustable rate mortgage. An adjustable rate mortgage (also known as an ARM) can be a great way to buy a home but it can also be a horrible mistake that can lead to foreclosure or even bankruptcy. The difference between joy and disaster is often in the mortgage contract itself.
When consumers hear the term "adjustable rate mortgage" they should understand that this is a very broad term indeed, and that it can mean many things. There are, literally, dozens of varieties of ARM's available to home shoppers, and knowing the good ones from the bad ones should be a home buyer's first concern.
In general, an adjustable rate mortgage begins with a set rate of interest for a specific length of time. This first rate is usually lower than what consumers can find in the fixed rate market at the same time. This lower rate is the inducement to take the ARM over the fixed rate products.
At some point in time, and this will be spelled out in the contract, the lower rate will be adjusted. The adjustment can go up or down, but normally goes up, as you might expect. The factors that determine how much the rate goes up (or down) are many and vary from one lender to another. They also vary depending on the level of the mortgage. In other words, an adjustable rate mortgage that is also considered a sub-prime loan may have a huge increase in rate (along with increases in fees and service charges) which can make the new monthly payment difficult to pay.
Prime loans, on the other hand, which are more traditional in nature and are considered less risky by lenders, usually have caps on the amount of increase that is allowable for any one increase. This helps home owners (at least to some degree) to better understand what the max payment might be for their home at any given time in the future. In a very real sense it voids the "sky is the limit" possibility.
The only way to know if a particular adjustable rate mortgage is right for you and your budget is to sit down and read the contract slowly and carefully. You may notice some odd-looking numbers such as 1/3, 2/7, or 1/10. The actual numbers you see may vary according to the contract you are looking at, but, in essence, they mean that the introductory interest rate will last for the first number in the term. In the case of 1/3, that means that for one year you pay the lower interest rate and an adjustment takes places and will continue to take place every three years afterward. A 2/7 would mean you get the first rate for two years, then an adjustment takes place and another adjustment will take place every seven years after.
An adjustable rate mortgage can be confusing even for the most intelligent of people. If you have any questions about the contract you should ask the lender or an attorney that you trust. The time to have these questions cleared up is before you sign the contract.
When consumers begin shopping for a home loan they are often presented with the option of using an adjustable rate mortgage. An adjustable rate mortgage (also known as an ARM) can be a great way to buy a home but it can also be a horrible mistake that can lead to foreclosure or even bankruptcy. The difference between joy and disaster is often in the mortgage contract itself.
When consumers hear the term "adjustable rate mortgage" they should understand that this is a very broad term indeed, and that it can mean many things. There are, literally, dozens of varieties of ARM's available to home shoppers, and knowing the good ones from the bad ones should be a home buyer's first concern.
In general, an adjustable rate mortgage begins with a set rate of interest for a specific length of time. This first rate is usually lower than what consumers can find in the fixed rate market at the same time. This lower rate is the inducement to take the ARM over the fixed rate products.
At some point in time, and this will be spelled out in the contract, the lower rate will be adjusted. The adjustment can go up or down, but normally goes up, as you might expect. The factors that determine how much the rate goes up (or down) are many and vary from one lender to another. They also vary depending on the level of the mortgage. In other words, an adjustable rate mortgage that is also considered a sub-prime loan may have a huge increase in rate (along with increases in fees and service charges) which can make the new monthly payment difficult to pay.
Prime loans, on the other hand, which are more traditional in nature and are considered less risky by lenders, usually have caps on the amount of increase that is allowable for any one increase. This helps home owners (at least to some degree) to better understand what the max payment might be for their home at any given time in the future. In a very real sense it voids the "sky is the limit" possibility.
The only way to know if a particular adjustable rate mortgage is right for you and your budget is to sit down and read the contract slowly and carefully. You may notice some odd-looking numbers such as 1/3, 2/7, or 1/10. The actual numbers you see may vary according to the contract you are looking at, but, in essence, they mean that the introductory interest rate will last for the first number in the term. In the case of 1/3, that means that for one year you pay the lower interest rate and an adjustment takes places and will continue to take place every three years afterward. A 2/7 would mean you get the first rate for two years, then an adjustment takes place and another adjustment will take place every seven years after.
An adjustable rate mortgage can be confusing even for the most intelligent of people. If you have any questions about the contract you should ask the lender or an attorney that you trust. The time to have these questions cleared up is before you sign the contract.
2008-12-06
Advantages and Disadvantages For Internet Banking
Advantages and Disadvantages For Internet Banking
If you belong to the generation that feeds on technology then Internet banking shouldn't at all be an issue for you. The Internet for you is the place to get things done quickly without actually going out. Banking is one of these things. For those who are a bit older, the concept of not interfacing with a human inside the bank will be a bitter pill to swallow. They still are yet to be convinced so it is necessary to weigh the advantages and disadvantages for Internet banking.
Apprehensive people know about the many wonders of the Internet and they have heard so much about Internet banking but they are still paying their bills by mail and depositing checks at their branch.
Many people are already using the Internet to shop for items, or even financial packages for mortgages and loans but when it's time to finalize, they still opt to go to the office of the company they chose and seal things with an agent.
Before comparing the advantages and disadvantages for Internet banking, let us first define the concept so others who do not know yet can have an idea.
The What and Who in online banking
When the Internet started to become very popular and computers began to become more and more advanced, many businesses started to shift their attention to the trend and established their online presence. This same trend also started to reshape the banking industry.
In the past, banks used computers to automate their daily transactions. These days, there hardly is any paper work at all since everything is done online via the bank's network system. The only thing that serves as a transaction record is the receipt a shopper gets when she's at the POS of her favorite boutique.
For banks, their Internet presence is a value-added service for existing and new customers.
Online banking goes by so many other names like PC banking, home banking, electronic banking, or Internet banking.
The first ones to test the waters were the large national banks. Soon, regional banks, smaller banks, financial companies, and credit unions joined in and implemented their own electronic banking system based on the Internet. These institutions that have expanded to online have since then referred to as brick-to-click banks as opposed to brick-and-mortar banks. The latter refers to those, which are yet to offer online banking o their customers.
Aside from the brick-to-clicks, there are "virtual" banks that have emerged. These are banks that do not have physical offices or branches, and any tellers or agents. These banks exist only in cyberspace but they still are covered by the same federal regulations that cover the ordinary banks.
Nowadays, the large banks have sites that provide fully secured and fully functioning online banking services that give their customers ultimate convenience. The smaller ones which are a bit more cautious to go full circle offer access to limited banking services like viewing of account balance and history viewing only.
The more banks that go online and succeed in making their services secured, the more that people will have lesser doubts about the advantages and disadvantages for Internet banking.
From:http://www.articlesbase.com/finance-articles/advantages-and-disadvantages-for-internet-banking-554273.html
If you belong to the generation that feeds on technology then Internet banking shouldn't at all be an issue for you. The Internet for you is the place to get things done quickly without actually going out. Banking is one of these things. For those who are a bit older, the concept of not interfacing with a human inside the bank will be a bitter pill to swallow. They still are yet to be convinced so it is necessary to weigh the advantages and disadvantages for Internet banking.
Apprehensive people know about the many wonders of the Internet and they have heard so much about Internet banking but they are still paying their bills by mail and depositing checks at their branch.
Many people are already using the Internet to shop for items, or even financial packages for mortgages and loans but when it's time to finalize, they still opt to go to the office of the company they chose and seal things with an agent.
Before comparing the advantages and disadvantages for Internet banking, let us first define the concept so others who do not know yet can have an idea.
The What and Who in online banking
When the Internet started to become very popular and computers began to become more and more advanced, many businesses started to shift their attention to the trend and established their online presence. This same trend also started to reshape the banking industry.
In the past, banks used computers to automate their daily transactions. These days, there hardly is any paper work at all since everything is done online via the bank's network system. The only thing that serves as a transaction record is the receipt a shopper gets when she's at the POS of her favorite boutique.
For banks, their Internet presence is a value-added service for existing and new customers.
Online banking goes by so many other names like PC banking, home banking, electronic banking, or Internet banking.
The first ones to test the waters were the large national banks. Soon, regional banks, smaller banks, financial companies, and credit unions joined in and implemented their own electronic banking system based on the Internet. These institutions that have expanded to online have since then referred to as brick-to-click banks as opposed to brick-and-mortar banks. The latter refers to those, which are yet to offer online banking o their customers.
Aside from the brick-to-clicks, there are "virtual" banks that have emerged. These are banks that do not have physical offices or branches, and any tellers or agents. These banks exist only in cyberspace but they still are covered by the same federal regulations that cover the ordinary banks.
Nowadays, the large banks have sites that provide fully secured and fully functioning online banking services that give their customers ultimate convenience. The smaller ones which are a bit more cautious to go full circle offer access to limited banking services like viewing of account balance and history viewing only.
The more banks that go online and succeed in making their services secured, the more that people will have lesser doubts about the advantages and disadvantages for Internet banking.
From:http://www.articlesbase.com/finance-articles/advantages-and-disadvantages-for-internet-banking-554273.html
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