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                                      Finance for Non-Financial Managers
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                               collateral. Depending on the lender, there may be monthly or
                               quarterly reporting of statistics and quarterly or annual audits by
                               bank accountants to satisfy the lender that the company is prop-
                               erly handling its paperwork and collection activities. Borrowing
                               cost for such loans is best characterized as medium—not the
                               lowest rates and not the highest. Actual rates depend very much
                               on the lender’s credit policies, the creditworthiness of the bor-
                               rower, and the relationship between them. Yes, even though
                               these are considered collateral loans, the lender’s willingness to
                               lend and flexibility on terms and conditions are very much influ-
                               enced by the relationship between borrower and lender.
                               Factoring—Selling Accounts Receivable and Passing Along
                               the Risk (Sometimes)
                               For companies whose credit rating is not strong enough to war-
                               rant other forms of borrowing, there is the option of factoring, or
                               selling the company’s accounts receivable balances for immedi-
                               ate cash. This is a widely used but relatively high-cost option—
                               typically from 15% to 30% percent APR—so companies typically
                               won’t choose this source if another option is available to them.
                                   Here’s how it works. A factoring company, or “factor,” will
                               purchase the customer invoices individually, following a detailed
                               review to identify accounts and invoices that qualify. The factor
                               pays the company for each invoice, after deducting a discount,
                               usually 3% to 5% of the amount of the invoice. The discount
                               compensates the factor for two things: (a) interest on the
                               money from the time it is paid until the customer repays them,
                               and (b) a premium for assuming the risk of collection from the
                               company. The company then will typically notify their customer
                               that the invoice owed to the company should now be paid to
                               the factor, rather than the company. When the customer pays in
                               due course, the factor receives 100% of the balance due, and
                               thus gets their money back, plus their fees. Along with this
                               process is a relatively heavy paperwork load in selling individual
                               invoices, documents flowing back and forth often daily—from
                               the borrower to support amounts sold, and from the factor to
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