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Advantages and Disadvantages of Trades Receivables
Trade receivables benefits
1. Trade receivables are not accounted for in the balance sheet as they are not replaced by their cash equivalents and this improves the promoter’s financial statement.
2. Promoter does not need to wait for payment from receivers. In this way, the promoter can continue to make profits even when payments are not made immediately.
3. Securities are rated very highly by rating agencies. This reduces the huge interest associated with lower rankings.
4. Assets and other liabilities can be coordinated and this eliminates the need for dividends.
5. It gives investors an opportunity to trade in capital markets for which the cost of funds is good.
1. Trade receipts increase costs. This is because receivables can only be securitized when the securitization process is able to realize their values.
2. As a result of the high level of flexibility, the securitization process can be used to secure anything from credit cards to even mortgages. Thus, an achievement record in the region of 3-6 is required to be a reliable receivables pool. Additionally loan guarantee terms are automatically reduced as the person seeking such securitization must have a predictable and stable source of cash flow.
Steps to ensure repayment
Stanford and Poor’s Rating Services (ND) take the following steps to ensure repayment:
1. Having a clear resolution period – Under normal circumstances, normal trade receivable pools will be closed within two to three months, provided the pools are relatively stable and all collections are accepted for debt repayment purposes. Thus, investors need to have a clear, structured and agreed timeframe for the realization of any trade.
2. Initial amortization event – To enhance the credit quality of the transaction, early amortization is accepted only to discount the floating interest period if the reinvestment of the investor’s cash flow is significantly less desirable and this may increase repayments as the reduction in interest will speed up repayments.
3. Cash Flow Allocation – Most trade receivables are based on the basic concept of borrowing. In this approach, the investor is entitled to a percentage of the collection that is equal to the amount invested on the basis of the loan. Thus, it increases the payback in equal terms to all investors and increases the total payback period.
4. Eligibility Criteria – It defines the conditions for the pool and limits investors to high risk takers, thereby reducing and potentially eliminating problems related to lack of repayment as investors who do not meet the criteria will not participate in the pool.
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