Advantages of trade accounts receivable
1. Trade receivables are not recorded on the balance sheet because they are not replaced by their cash equivalent, and this improves the financial condition of the originator.
2. The originator does not need to wait for accounts receivable payments to be received. Therefore, the originator can continue to make a profit even when payments are not made immediately.
3. Securities are rated much higher by rating agencies. This reduces the enormous interest associated with a lower ranking.
4. Assets and other liabilities can be coordinated and this eliminates the need for dividends.
5. Provides investors the opportunity to operate in capital markets that have better financing costs.
Disadvantages
1. Trade accounts receivable increase costs. This is because accounts receivable can only be securitized when the securitization process is capable of realizing their values.
2. As a result of the high level of flexibility, the securitization process can be used to securitize anything from credit cards to mortgages. Therefore, a track record of achievement in the region of 3-6 is required to be a creditable accounts receivable group. In addition, the terms of the loan guarantee are automatically reduced because the person seeking such securitization must have a stable and predictable source of cash flow.
Steps to guarantee reimbursement
Stanford and Poor’s Rating Services (nd) provides steps that can be taken to guarantee payment such as:
1. Have a clear resolution period – Under normal conditions, typical trade receivables pools will be liquidated in two to three months if the pools are relatively constant and all collections are made for the purpose of paying debts. Therefore, investors must have a clear, structured and agreed resolution period for any trade receivables.
two. Early repayment events – in order to increase the credit quality of the transaction, early amortization is adopted to discount the interest-only revolving period if reinvestment of investors’ cash flow becomes significantly less desirable and this may increase repayment because reduction interest rate will increase the speed of repayment.
3. Cash flow allocation – Most trade receivables are based on the debt base concept. In this approach, investors are entitled to receive a percentage of the proceeds that is equal to the amount invested on the loan basis. Thus, it increases the repayment to all investors on equal terms and increases the overall repayment period.
Four. Eligibility criteria – this defines the conditions for the group and limits investors to high-risk accounts receivable, thus reducing and potentially eliminating the problems associated with non-payment, as investors who do not meet the criteria will not participate in the group .
