Finance Industry Essay Example | Topics and Well Written Essays - 2500 words

Finance Industry - Essay ExampleAt present, debt factoring and debt subordination are the preferred means for companies to finance their needs for additional working capital. The financial flexibility provided by these two alternatives does not require the company management to relinquish any portion of their control or equity. They simply come with costs that then form part of the companys financing-related expenses.Many companies have huge accounts receivables in their balance sheets, relative to their other asset items. These accounts receivables shadower be of much better use to the company if they can be converted to cash sooner than their dates of collectability. Their conversion to cash through debt factoring should change the company to do more business transactions and to produce higher income figures. (ABFA, 2009)Debt factoring is a three-party transaction that is consummated when a factor buys a companys accounts receivables, generally without recourse. Hence, the fact or shoulders any losses resulting from the debtors inability to pay. These debtors, by virtue of the factoring transaction, will be liable to pay the factor - not the certain company accreditor - the amounts due from them. (Brigham & Houston, 1998, p. 691) The factor does all three things ensure the collection of the companys receivables, shoulder the losses resulting from bad debts and provide financing for the company through the corrupt of its receivables. (Brealey, Myers & Marcus, 1995,p. 506) Meanwhile, debt subordination involves giving a specific creditor the last ranking in terms of claims on the debtor companys assets and income. Thus, subordinated debenture bonds - or uncollateralized debts - are issues that entitle owners to payments that are secured by what is left of the company after its secured debts, debenture bonds and other general liabilities have been settled. (Fabozzi, 2000, p. 86)Both debt factoring and debt subordination are available to companies with good credit records. Both can be handy tools for raising money to beef up the companys working capital, to take advantage of opportunities that require cash, to fund the companys acquisition of unsanded plant equipments, to finance an expansion phase or to accomplish similar ventures. The Costs of Debt Factoring and Debt SubordinationFactoring, then, helps to improve a companys cash flow. It also importantly reduces the expenses a company ordinarily incurs in doing preliminary credit investigation on each customer applying for a credit line and in ensuring the echt collection of their accounts receivable. In return for these benefits, debt factoring as an alternative comes with two costs that would have to be paid by the company the interest and the fees. The interests supercharged amount to 1.50 to 3.00 percent over the prevailing base rate. Then fees in the scale of 0.75 to 2.50 percent of turnover are as well collected. (The UK Insolvency Helpline, 2009)Issuing subordinated debts, meanwhile, necessitate paying the service fees of investment companies and rating agencies and the interest rates attached to the debt instruments which may range from 10.00 to 15.00 percent. Related expenses are further incurred in the presentation, road-show and similar trade activities that are all orchestrated to sell the companys subordinated debt instruments.Preparation