✯✯✯ Legal Factors Definition

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Legal Factors Definition



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This set out new or enhanced public accounting standards for all American public company boards. This law came about after several major corporate accounting scandals, such as Enron, Peregrine Systems, and WorldCom. Many regulations are applied at a regional as well as a national level and create another layer of complexity that you must consider when developing your strategy. It is these types of influences that can have a significant impact on the ease of operations and require detailed investigations before any decision is made.

Legal Factors. For example, Insurance and banking organizations have to demonstrate their legal compliance to the regulatory body, which has implications for how they operate. Key Points Legal factors include current and impending legislation that may affect the industry in areas such as employment, competition, and health and safety. Certain companies factor accounts when the available cash balance held by the firm is insufficient to meet current obligations and accommodate its other cash needs, such as new orders or contracts; in other industries, however, such as textiles or apparel, for example, financially sound companies factor their accounts simply because this is the historic method of financing. The use of factoring to obtain the cash needed to accommodate a firm's immediate cash needs will allow the firm to maintain a smaller ongoing cash balance.

By reducing the size of its cash balances, more money is made available for investment in the firm's growth. Debt factoring is also used as a financial instrument to provide better cash flow control especially if a company currently has a lot of accounts receivables with different credit terms to manage. A company sells its invoices at a discount to their face value when it calculates that it will be better off using the proceeds to bolster its own growth than it would be by effectively functioning as its "customer's bank.

Therefore, the trade-off between the return the firm earns on investment in production and the cost of utilizing a factor is crucial in determining both the extent factoring is used and the quantity of cash the firm holds on hand. Many businesses have cash flow that varies. It might be relatively large in one period, and relatively small in another period. Because of this, businesses find it necessary to both maintain a cash balance on hand, and to use such methods as factoring, in order to enable them to cover their short term cash needs in those periods in which these needs exceed the cash flow.

Each business must then decide how much it wants to depend on factoring to cover short falls in cash, and how large a cash balance it wants to maintain in order to ensure it has enough cash on hand during periods of low cash flow. Generally, the variability in the cash flow will determine the size of the cash balance a business will tend to hold as well as the extent it may have to depend on such financial mechanisms as factoring. Cash flow variability is directly related to two factors:.

If cash flow can decrease drastically, the business will find it needs large amounts of cash from either existing cash balances or from a factor to cover its obligations during this period of time. Likewise, the longer a relatively low cash flow can last, the more cash is needed from another source cash balances or a factor to cover its obligations during this time. As indicated, the business must balance the opportunity cost of losing a return on the cash that it could otherwise invest, against the costs associated with the use of factoring. The cash balance a business holds is essentially a demand for transactions money. As stated, the size of the cash balance the firm decides to hold is directly related to its unwillingness to pay the costs necessary to use a factor to finance its short term cash needs.

The problem faced by the business in deciding the size of the cash balance it wants to maintain on hand is similar to the decision it faces when it decides how much physical inventory it should maintain. In this situation, the business must balance the cost of obtaining cash proceeds from a factor against the opportunity cost of the losing the Rate of Return it earns on investment within its business. Today factoring's rationale still includes the financial task of advancing funds to smaller rapidly growing firms who sell to larger more credit-worthy organizations. While almost never taking possession of the goods sold, factors offer various combinations of money and supportive services when advancing funds. Factors often provide their clients four key services: information on the creditworthiness of their prospective customers domestic and international, and, in nonrecourse factoring, acceptance of the credit risk for "approved" accounts; maintain the history of payments by customers i.

The outsourced credit function both extends the small firms effective addressable marketplace and insulates it from the survival-threatening destructive impact of a bankruptcy or financial difficulty of a major customer. A second key service is the operation of the accounts receivable function. The services eliminate the need and cost for permanent skilled staff found within large firms. Although today even they are outsourcing such back-office functions. More importantly, the services insure the entrepreneurs and owners against a major source of a liquidity crises and their equity. The factoring process can be broken up into two parts: the initial account setup and ongoing funding.

Setting up a factoring account typically takes one to two weeks and involves submitting an application, a list of clients, an accounts receivable aging report and a sample invoice. The approval process involves detailed underwriting, during which time the factoring company can ask for additional documents, such as documents of incorporation, financials, and banks statements. If approved, the business will be set up with a maximum credit line from which they can draw. In the case of notification factoring, the arrangement is not confidential and approval is contingent upon successful notification; a process by which factoring companies send the business's client or account debtor a Notice of Assignment.

The Notice of Assignment serves to. Once the account is set up, the business is ready to start funding invoices. Invoices are still approved on an individual basis, but most invoices can be funded in a business day or two, as long as they meet the factor's criteria. Receivables are funded in two parts. This is deposited directly to the business's bank account. Non-recourse factoring should not be confused with making a loan. Factoring is like a credit card where the bank factor is buying the debt of the customer without recourse to the seller; if the buyer doesn't pay the amount to the seller the bank cannot claim the money from the seller or the merchant, just as the bank in this case can only claim the money from the debt issuer.

One more difference between the factoring and invoice discounting is that in case of factoring the seller assigns all receivables of a certain buyer s to the factor whereas in invoice discounting the borrower the seller assigns a receivable balance, not specific invoices. A factor is therefore more concerned with the credit-worthiness of the company's customers. A non-recourse factor assumes the " credit risk " that an account will not collect due solely to the financial inability of account debtor to pay. In the United States, if the factor does not assume the credit risk on the purchased accounts, in most cases a court will recharacterize the transaction as a secured loan. When a company decides to factors account receivables invoices to a principles factors or broker, it needs to understands the risks and rewards involved with factoring.

Amount of funding can vary depending on the specific accounts receivables, debtor and industry that factoring occurs in. Factors can limit and restrict funding in such occasions where the debtor is found not credit worthy, or the invoice amount represents too big of a portion of the business' annual income. Another area of concern is when the cost of invoice factoring is calculated. It's a compound of an administration charge and interest earned overtime as the debtor takes time to repay the original invoice.

Not all factoring companies charge interest over the time it takes to collect from a debtor, in this case only the administration charge needs to be taken into account although this type of facility is comparatively rare. There are major industries which stand out in the factoring industry which are:. The discount rate is the fee a factoring company charges to provide the factoring service. Since a formal factoring transaction involves the outright purchase of the invoice, the discount rate is typically stated as a percentage of the face value of the invoices. In contrast, companies that do accounts receivable financing may charge per week or per month. The advance rate is the percentage of an invoice that is paid out by the factoring company upfront.

The difference between the face value of the invoice and the advance rates serves to protect factors against any losses and to ensure coverage for their fees. Once the invoice is paid, the factor gives the difference between the face value, advance amount and fees back to the business in the form of a factoring rebate. Whereas the difference between the invoice face value and the advance serves as a reserve for a specific invoice, many factors also hold an ongoing reserve account which serves to further reduce the risk for the factoring company.

While factoring fees and terms range widely, many factoring companies will have monthly minimums and require a long-term contract as a measure to guarantee a profitable relationship. Although shorter contract periods are now becoming more common, contracts and monthly minimums are typical with "whole ledger" factoring, which entails factoring all of a company's invoices or all of the company's invoices from a particular debtor.

Spot factoring, or single invoice discounting, is an alternative to "whole ledger" and allows a company to factor a single invoice. The added flexibility for the business, and lack of predictable volume and monthly minimums for factoring providers means that spot factoring transactions usually carry a cost premium. More More Languages. Page actions Read View source History. Legal factors affecting business See also STEEPLE analysis Ethical factors affecting business Industry environment Political factors affecting business Economic factors affecting business STEEP analysis International marketing research Regulatory data Economic factor Legal factors affecting business include all regulatory and law determinants that can negatively or positively affect results of market actions and decisions of management of company functioning in particular country.

Legal factors connected to tax and customs regulations country tax code may be different in every country served by business , tax restrictions for particular types of business, export and import restrictions, tax relief for some types of products or businesses promoting development, taxes and customs imposed on consumed goods may influence demand , individual income tax, corporate income tax, overall tax and fiscal policy excise duties ,. Category : Strategic management methods. Tools Upload file Special pages Page information.

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