Pros and cons of accounts receivable

Benefits of accounts receivable

1. Accounts receivable are not included in the balance sheet because they are not replaced by their cash, which improves the author’s accounts.

2. It is not necessary for the author to wait for the payments to be received from the receivables. The originator can thus continue to make a profit, even when payments are not made immediately.

3. Securities are ranked much higher by credit rating agencies. This reduces the enormous interest associated with lower placement.

4. Assets and other liabilities can be coordinated, eliminating the need for dividends.

5. It allows investors to trade in capital markets that have better financing costs.

Disadvantages

1. Accounts receivable 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 degree of flexibility, the securitization process can be used to securitize everything from credit cards to even mortgage loans. Thus, an implementation record in the range of 3-6 is required to be a receivable pool. In addition, the loan guarantee terms are automatically reduced because the person seeking such securitization must have a predictable and stable source of cash flow.

Steps to secure repayment

Stanford and Poor’s Rating Services (n.d.) include steps that can be taken to secure repayments such as:

First To have a clear settlement period – Under normal conditions, typical trading receivable pools are liquidated over two to three months if the pools are relatively constant and all collections are adopted for debt repayment. Thus, investors must have a clear, structured and agreed settlement period for any accounts receivable.

2nd Early depreciation events – To increase the credit quality of the transaction, early amortization is adopted to repay the revolving period of interest only if reinvestment of investors’ cash flow becomes significantly less desirable, and this may increase repayment because reduction in interest rates increases the repayment rate.

Third Cash flow allocation – Most of the accounts receivable are based on a loan base concept. In this approach, investors are entitled to receive a percentage of the collection equal to the amount invested over the loan base. Thus, it increases the repayment to all investors on equal terms and increases the total repayment time.

4th Eligibility criteria – this defines the terms of the pool and restricts investors to high-risk receivables, reducing and potentially eliminating problems associated with non-repayment, as investors who do not meet the criteria will not participate in the pool.