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A Time for Forgiveness

26 USC 1273 -Determination of amount of

original issue discount

This preliminary release may be subject to further revision before it is released again as a finalversion. As with other online versions of the Code, theU.S. Code Classification Tablesshould beconsulted for the latest laws affecting the Code. Those using the USCPrelim should verify thetext against the printed slip laws available fromGPO(Government Printing Office), the laws asshown onTHOMAS(a legislative service of the Library of Congress), and the final version of the

Code when it becomes available.

Current through Pub. L.112-90.(SeePublic Laws for the current Congress.)

(a) General rule

For purposes of this subpart

(1) In general

The term original issue discount means the excess (if any) of

(A) the stated redemptionprice at maturity, over

(B) the issue price.

(2) Stated redemption price at maturity

The term stated redemption price at maturity means the amount fixed by the last modificationof the purchase agreement and includes interest and other amounts payable at that time (otherthan any interest based on a fixed rate, and payable unconditionally at fixed periodic intervals of1 year or less during the entire term of the debt instrument).

(3) 1/4 of 1 percent de minimis rule

If the original issue discount determined under paragraph (1) is less than

(A) 1/4 of 1 percent of the stated redemption price at maturity, multiplied by

(B) the number of complete years to maturity,then the original issue discount shall be treated as zero.

(b) Issue price

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For purposes of this subpart

(1) Publicly offered debt instruments not issued for property

In the case of any issue of debt instruments

(A) publicly offered, and

(B) not issued for property,the issue price is the initial offering price to the public (excluding bond houses and brokers) at

which price a substantial amount of such debt instruments was sold.

(2) Other debt instruments not issued for property

In the case of any issue of debt instruments not issued for property and not publicly offered, theissue price of each such instrument is the price paid by the first buyer of such debt instrument.

(3) Debt instruments issued for property where there is public trading

In the case of a debt instrument which is issued for property and which

(A) is part of an issue a portion of which is traded on an established securities market, or

(B)

(i) is issued for stock or securities which are traded on an established securities market, or

(ii) to the extent provided in regulations, is issued for property (other than stock or securities) ofa kind regularly traded on an established market,the issue price of such debt instrument shall be the fair market value of such property.

(4) Other cases

Except in any case

(A) to which paragraph (1), (2), or (3) of this subsection applies, or

(B) to which section1274applies,the issue price of a debt instrument which is issued for property shall be the stated redemptionprice at maturity.

(5) Property

In applying this subsection, the term property includes services and the right to use property,but such term does not include money.

(c) Special rules for applying subsection (b)

For purposes of subsection (b)

(1) Initial offering price; price paid by the first buyer

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The terms initial offering price and price paid by the first buyer include the aggregatepayments made by the purchaser under the purchase agreement, including modificationsthereof.

(2) Treatment of investment units

In the case of any debt instrument and an option, security, or other property issued together asan investment unit

(A) the issue price for such unit shall be determined in accordance with the rules of thissubsection and subsection (b) as if it were a debt instrument,

(B) the issue price determined for such unit shall be allocated to each element of such unit onthe basis of the relationship of the fair market value of such element to the fair market value ofall elements in such unit, and

(C) the issue price of any debt instrument included in such unit shall be the portion of the issueprice of the unit allocated to the debt instrument under subparagraph (B).

26 USC 9602 -Sec. 9602. Management of

Trust Funds

(a)Report It shall be the duty of the Secretary of the Treasuryto hold each Trust Fundestablished by subchapter A, and (after consultation with any other trustees of the TrustFund) to report to the Congress each year on the financial condition and the results of theoperations of each such Trust Fund during the preceding fiscal year and on its expected

condition and operations during the next 5 fiscal years.

Such report shall be printed as a House document of the session of the Congress to whichthe report is made. (b) Investment (1) In general It shall be the duty of the Secretary of theTreasury to invest such portion of any Trust Fund established by subchapter A as is not, inhis judgment, required to meet current withdrawals.

Such investments may be made only in interest-bearingobligationsof the United States.

For such purpose, such obligations may be acquired - (A) on original issueat the issueprice, or (B) by purchase of outstanding obligations at the market price. (2) Sale of

obligations Any obligation acquired by a Trust Fund established by subchapter A may besold by the Secretary of the Treasury at the market price. (3) Interest on certain proceedsThe interest on, and the proceeds from the sale or redemption of, any obligations held in aTrust Fund established by subchapter A shall be credited to and form a part of the TrustFund.

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Interest bearing

In accounting, which is the process of communicating financial information about a businessentity to users such as shareholders and managers,[1] the prefix interest bearing is usedadjectively to simply describe accounts that accrue interest. In contrast the term non-interestbearingis used to describe accounts that do not accrue interest.[2]

Shareholder

A shareholder or stockholder is an individual or institution (including a corporation) thatlegally owns any part of ashareofstockin a public or private corporation. Shareholders own thestock, but not the corporation itself. (Fama 1980).

Stockholders are granted special privileges depending on the class of stock. These rights mayinclude:

The right to sell their shares, The right to vote on the directors nominated by the board, The right to nominate directors (although this is very difficult in practice because of

minority protections) and proposeshareholder resolutions, The right to dividends if they are declared, The right to purchase new shares issued by the company, and The right to what assets remain after aliquidation.

Stockholders or shareholders are considered by some to be a subsetofstakeholders,which mayinclude anyone who has a direct or indirect interest in the business entity.For example, labor,

suppliers, customers, the community, etc., are typically considered stakeholders becausethey contribute value and/or are impacted by the corporation.

Shareholders in the primary market who buy IPOs provide capital to corporations; however, thevast majority of shareholders are in the secondary market and provide no capital directly to thecorporation.

Therefore, contrary to popular opinion, shareholders of American public corporations are notthe(1) owners of the corporation, (2) the claimants of the profit, nor (3) investors, as in thecontributors of capital.[1]

ManagementManagementis the act of getting people together to accomplish desired goals andobjectivesusing available resources efficiently and effectively (DOJ/Court System). Managementcomprisesplanning,organizing,staffing,leadingor directing, andcontrollinganorganization(agroup of one or more people or entities) or effort for the purpose of accomplishing a goal.

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Resourcing encompasses the deployment and manipulation of human resources, financialresources,technologicalresources andnatural resources.

Since organizations can be viewed assystems,management can also be defined as human action,including design, to facilitate the production of useful outcomes from a system. This view opens

the opportunity to 'manage' oneself, a pre-requisite to attempting to manage others.

Human resources

Human resources is the set of individuals who make up the workforce of an organization,business sectoror aneconomy."Human capital"is sometimes used synonymously with humanresources, although human capital typically refers to a more narrow view; i.e., the knowledge theindividuals embody and can contribute to an organization. Likewise, other terms sometimes usedinclude "manpower", "talent", "labor" or simply "people".

The professional discipline and business function that oversees an organization's human

resources is calledhuman resource management(HRM, or simply HR).

Human capital

Human capital is the stock of competencies, knowledge, social and personality attributes,includingcreativity,embodied in the ability to performlaborso as to produceeconomic value.Itis an aggregate economic view of the human being acting within economies, which is an attemptto capture the social, biological, cultural and psychological complexity as they interact in explicitand/or economic transactions.

It was assumed in early economic theories, reflecting the context in which the secondary sectorof the economy was producing much more than the tertiary sector was able to produce at thetime in most countries - to be afungibleresource,homogeneous, and easily interchangeable, andit was referred to simply as workforce or labor, one of three factors of production (the othersbeing land, and assumed-interchangeable assets of money and physical equipment). Just as landbecame recognized asnatural capitaland an asset in itself, and human factors of production wereraised from this simple mechanistic analysis to human capital. In modern technical financialanalysis, the term "balanced growth"refers to the goal of equal growth of both aggregate humancapabilities and physical assets that produce goods and services.

The assumption that labour or workforces could be easily modelled in aggregate began to be

challenged in 1950s when thetertiary sector,which demanded creativity, begun to produce morethan the secondary sector was producing at the time in the most developed countries in theworld.

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Clark's Sector model for US economy 1850 -2009.[1]

Accordingly much more attention was paid to factors that led to success versus failure wherehuman management was concerned. The role ofleadership,talent,evencelebritywas explored.

Today, most theories attempt to break down human capital into one or more components foranalysis - usually called "intangibles". Most commonly,social capital,the sum of social bondsand relationships, has come to be recognized, along with many synonyms such as goodwillorbrand valueorsocial cohesionorsocial resilienceand related concepts likecelebrityorfame,asdistinct from the talent that an individual (such as anathletehas uniquely) has developed thatcannot be passed on to others regardless of effort, and those aspects that can be transferred ortaught:instructional capital.Less commonly, some analyses conflate good instructions for healthwith health itself, or good knowledge managementhabits or systems with the instructions theycompile and manage, or the "intellectual capital" of teams - a reflection of their social and

instructional capacities, with some assumptions about their individual uniqueness in the context

in which they work. In general these analyses acknowledge that individual trained bodies,teachable ideas or skills, and social influence or persuasion power, are different.

Management accountingis often concerned with questions of how to model human beings as acapital asset.However it is broken down or defined, human capital is vitally important for anorganization's success (Crook et al., 2011); human capital increases through education andexperience.[2]

In 2010, the OECD (the Organization of Economic Co-operation and Development) encouragedthe governments of advanced economies to embrace policies to increase innovation andknowledge in products and services as an economical path to continued prosperity. [3].International policies also often address human capital flight, which is the loss of talented ortrained persons from a country that invested in them, to another country which benefits fromtheir arrival without investing in them.

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United States Secretary of the Treasury

Not to be confused withTreasurer of the United States.

United States

Secretary of the Treasury

Official Seal

Incumbent

Timothy Geithner

since January 26, 2009

Formation September 11, 1789

First holder Alexander Hamilton

Succession Fifth

Website www.treasury.gov

The Secretary of the Treasury of the United States is the head of the United StatesDepartment of the Treasury,which is concerned with financial and monetary matters, and, until2003, also with some issues of national security and defense. This position in the FederalGovernment of the United Statesis analogous to theMinister of Financein many other countries.Most of the Department's law enforcement agencies such as the U.S. Customs Service, the

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Bureau of Alcohol, Tobacco, Firearms and Explosives(ATF), and theU.S. Secret Servicewerereassigned to other Departments in 2003 in conjunction with the creation of the Department ofHomeland Security.The Secretary of the Treasury is a member of the President'sCabinet,andsince theClinton Administration,has been a member of theU.S. National Security Council.Bylaw and by tradition, the Secretary of the Treasury is fifth in theUnited States presidential line of

succession,in case of some extreme calamity in the United States.

From theU.S. Department of the Treasury website:

"The Secretary of the Treasury is the principal economic advisor to the President andplays a critical role in policy-making by bringing an economic and government financialpolicy perspective to issues facing the government. The Secretary is responsible forformulating and recommending domestic and international financial, economic, and taxpolicy, participating in the formulation of broad fiscal policies that have generalsignificance for the economy, and managing the public debt. The Secretary oversees theactivities of the Department in carrying out its major law enforcement responsibilities; in

serving as the financial agent for the United States Government;and in manufacturingcoinsandcurrency."The Chief Financial Officer of the government, the Secretary serves as Chairman ProTempore of the President's Economic Policy Council, Chairman of the Boards andManaging Trustee of the Social Security and Medicare Trust Funds, and as U.S.Governor of theInternational Monetary Fund,theInternational Bank for Reconstructionand Development,theInter-American Development Bank,theAsian Development Bank,and theEuropean Bank for Reconstruction and Development."

The Secretary along with theTreasurermust signFederal Reserve notesbefore they can becomelegal tender.[citation needed] The Secretary also manages the United States Emergency Economic

Stabilization fund.

The current Secretary of the Treasury isTimothy Geithner.The Secretary of the Treasury earns$191,300 per year.

redemption

noun

1. an act ofredeeming or the state of beingredeemed.2. deliverance;rescue.

3. Theology. deliverancefromsin;salvation.4. atonementfor guilt.5. repurchase,as of something sold.

Redemption as a theological concept is found in several different religions. In Buddhist theology itencompasses a release from worldly desires. As aChristian theologicalterm, it refers to the deliveranceof Christians from sin.[1] In Judaism, redemption can refer both to the Exodus from slavery in ancientEgypt,and deliverance from exile.

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redeem

verb(used with object)

1. tobuyor pay off; clear by payment: to redeem a mortgage.

2. to buy back, as after a taxsale or a mortgage foreclosure.3. to recover (something pledgedormortgaged)by payment or other satisfaction: to redeemapawned watch.4. to exchange (bonds, trading stamps,etc.)for money or goods.5. to convert (paper money) into specie.

Pledge (law)

A pledgeis abailmentthatconveyspossessorytitleto property owned by a debtor (thepledgor)to a creditor (the pledgee) to secure repayment for some debtor obligation and to the mutual

benefit of both parties.[1][2] The term is also used to denote the property which constitutes thesecurity.

Pledge is the pignus of Roman law, from which most of the modern law on the subject isderived, but is generally a feature of even the most basic legal systems. It differs fromhypothecationand from the more usual mortgage in that the pledge is in the possession of thepledgee. It is similar, however, in that all three can apply to personal and real property. A pledgeof personal property is known as a pawnand that of real property is called an antichresis. Inearlier medieval law, especially in Germanic law, two types of pledge existed, being eitherpossessory (cf. Old English wed, Old Frenchgage, Old High German wetti, Latinpignusdepositum), i.e. delivered from the outset, or a non-possessory (cf. OE bd, OFr nam, nant,

OHG pfant, Lpignus oppositum), i.e. distrained on the maturity date, and the latter essentiallygave rise to the legal principle ofdistraint.This distinction still remains in some systems, e.g.French gage vs. nantissement and Dutch vuistpand vs. stil pand. Token, symbolic reciprocalpledges were commonly incorporated into formal ceremonies(see baptism page 53) as a

way of solidifying agreements and other transactions.

The chief difference between Roman and English law is that certain things (e.g. apparel,furnitureand instruments of tillage) could not be pledged in Roman law, while there is no suchrestriction in English law . In the case of a pledge, a special property passes to the pledgee,sufficient to enable him to maintain an action against a wrongdoer, but the general property, thatis the property subject to the pledge, remains in the pledgor.

As the pledge is for the benefit of both parties, the pledgee is bound to exercise only ordinarycare over the pledge. The pledgee has the right of selling the pledge if the pledgor make defaultin payment at the stipulated time. No right is acquired by the wrongful sale of a pledge except inthe case of property passing by delivery, such as money or negotiable securities. In the case of awrongful sale by a pledgee, the pledgor cannot recover the value of the pledge without a tenderof the amount due.

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The law ofScotlandand theUnited Statesgenerally agrees with that of England as to pledges.The main difference is that in Scotland and in Louisiana a pledge cannot be sold unless withjudicial authority. In some of theU.S. statesthecommon lawas it existed apart from theFactorsActs is still followed; in others the factor has more or less restricted power to give a title bypledge.

Obligation

An obligationis a requirement to take some course of action, whether legalormoral.There arealso obligations in other normative contexts, such as obligations of etiquette,socialobligations,and possibly in terms of politics,where obligations are requirements which must be fulfilled.These are generally legal obligations, which can incur a penalty for unfulfilment, althoughcertain people are obliged to carry out certain actions for other reasons as well, whether as atradition or for social reasons. Obligations vary from person to person: for example, a personholding a political office will generally have far more obligations than an average adult citizen,

Colonel Edward Mandel House(to Woodrow Wilson found in Wilsonspersonal diary/logs - 1913 to 1921 exact date unknown):

Very soon, every American will be required to registertheir biological property (that's youand your children) in a national system designed to keep track of the people and that willoperate under the ancient system of pledging. By such methodology, we can compel peopleto submit to our agenda, which will affect our security as a charge back for our fiat paper

currency. Every American will be forced to register or suffer being able to work and earn aliving. They will be our chattels (property) and we will hold the security interestover themforever, by operation of the law merchant under the scheme of secured transactions.Americans, by unknowingly or unwittingly delivering the bills of lading (Birth Certificate) tous will be rendered bankrupt and insolvent, secured by their pledges. They will be strippedof their rights and given a commercial value designed to make us a profit and they will benone the wiser, for not one man in a million could ever figure our plans and, if by accidentone or two should figure it out, we have in our arsenal plausible deniability. After all, this isthe only logical way to fund government, by floating liens and debts to the registrants in theform of benefits and privileges. This will inevitably reap us huge profits beyond our wildestexpectations and leave every American a contributor to this fraud, which we will call "Social

Insurance." Without realizing it, every American will unknowingly be our servant, howeverbegrudgingly. The people will become helpless and without any hope for their redemptionand we will employ the high office (presidency) of our dummy corporation (USA) to fomentthis plot against America."

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who themselves will have more obligations than a child. [citation needed]Obligations are generallygranted in return for an increase in an individuals rights or power.

The word "obligation" can also designate a written obligation, or such things as bank notes,coins, checks, bonds, stamps, or securities.

Factoring (finance)

Factoring is a financial transaction whereby a business sells its accounts receivable (i.e.,invoices) to a third party (called a factor) at a discount. In "advance" factoring, the factorprovides financing to the seller of the accounts in the form of a cash "advance," often 70-85% ofthe purchase price of the accounts, with the balance of the purchase price being paid, net of thefactor's discount fee (commission) and other charges, upon collection. In "maturity" factoring,the factor makes no advance on the purchased accounts; rather, the purchase price is paid on orabout the average maturity date of the accounts being purchased in the batch. Factoring differs

from a bank loan in several ways. The emphasis is on the value of the receivables (essentially afinancial asset), whereas a bank focuses more on the value of the borrower's total assets, andoften also considers, in underwriting the loan, the value attributable to non-accounts collateralowned by the borrower. Such collateral includes inventory, equipment, and real property,[1][2]That is, a bank loan issuer looks beyond the credit-worthiness of the firm's accounts receivablesand of the account debtors (obligors) thereon. Secondly, factoring is not a loan it is thepurchase of a financial asset (the receivable). Third, a nonrecourse factor assumes the "creditrisk", that a purchased account will not collect due solely to the financial inability of accountdebtor to pay. In the United States, if the factor does not assume credit risk on the purchasedaccounts, in most cases a court will recharacterize the transaction as asecured loan.

It is different from forfaiting in the sense that forfaiting is a transaction-based operationinvolving exporters in which the firm sells one of its transactions,[3]while factoring is a FinancialTransaction that involves the Sale of any portion of the firm's Receivables.[1][2]

Factoring is a word often misused synonymously with invoice discounting, known as"Receivables Assignment" in American Accounting ("Generally Accepted AccountingPrinciples"/"GAAP"propagated by FASB)

[2] - factoring is the sale of receivables, whereas

invoice discounting is borrowing where the receivable is used ascollateral.[2]However, in someother markets, such as the UK, invoice discounting is considered to be a form of factoringinvolving the assignment of receivables and is included in official statistics.

[4]It is therefore not

considered to be borrowing. In this case the arrangement is usually confidential in that the debtoris not notified of the arrangement and the seller of the receivable collects the debt on behalf ofthe factor.

The three parties directly involved are: the one who sells the receivable, thedebtor(the accountdebtor, or customer of the seller), and the factor. The receivableis essentially a financial assetassociated with the debtor'sliabilityto pay money owed to the seller (usually for work performedor goods sold). The seller then sells one or more of its invoices (the receivables) at a discount tothe third party, the specialized financial organization (aka the factor), often, in advance factoring,

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to obtain cash. The sale of the receivables essentially transfers ownership of the receivables tothe factor, indicating the factor obtains all of the rights associated with the receivables.[1][2]Accordingly, the factor obtains the right to receive the payments made by the debtor for theinvoice amount and, in nonrecourse factoring, must bear the loss if the account debtor does notpay the invoice amount due solely to his or its financial inability to pay. Usually, the account

debtor is notified of the sale of the receivable, and the factor bills the debtor and makes allcollections; however, non-notification factoring, where the client (seller) collects the accountssold to the factor, as agent of the factor, also occurs. There are three principal parts to "advance"factoring transaction; (a) the advance, a percentage of the invoice face value that is paid to theseller at the time of sale, (b) the reserve, the remainder of the purchase price held until thepayment by the account debtor is made and (c) the discount fee, the cost associated with thetransaction which is deducted from the reserve, along with other expenses, upon collection,before the reserve is disbursed to the factor's client. Sometimes the factor charges the seller (thefactor's "client") both a discount fee, for the factor's assumption of credit risk and other servicesprovided, as well as interest on the factor's advance, based on how long the advance, oftentreated as a loan (repaid by set-off against the factor's purchase obligation, when the account is

collected), is outstanding.

[5]

The factor also estimates the amount that may not be collected dueto non-payment, and makes accommodation for this in pricing, when determining the purchaseprice to be paid to the seller. The factor's overall profit is the difference between the price it paidfor the invoice and the money received from the debtor, less the amount lost due to non-payment.[2]

In the United States, under the Generally Accepted Accounting Principles receivables areconsidered sold, under Statement of Financial Accounting Standards No. 140, when the buyerhas "no recourse,".[6] Moreover, to treat the transaction as a sale under GAAP, the seller'smonetary liability under any "recourse" provision must be readily estimated at the time of thesale. Otherwise, the financial transaction is treated as a loan, with the receivables used ascollateral.

History

Factoring's origins lie in the financing of trade, particularly international trade.Factoring as afact of business life was underway in Englandprior to 1400, and it came to America with thePilgrims, around 1620.

[7] It appears to be closely related to early merchant banking activities.

The latter however evolved by extension to non-trade related financing such as sovereign debt.[8]Like all financial instruments, factoring evolved over centuries. This was driven by changes inthe organization of companies; technology, particularly air travel and non-face to facecommunications technologies starting with the telegraph, followed by the telephone and then

computers.These also drove and were driven by modifications of the common law framework inEngland and theUnited States.[9]

Governments were latecomers to the facilitation of trade financed by factors. English commonlaw originally held that unless the debtor was notified, the assignment between the seller ofinvoices and the factor was not valid. TheCanadian Federal Governmentlegislation governingthe assignment of moneys owed by it still reflects this stance as does provincial governmentlegislation modelled after it. As late as the current century the courts have heard arguments that

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without notification of the debtor the assignment was not valid. In the United States, by 1949 themajority of state governments had adopted a rule that the debtor did not have to be notified thusopening up the possibility of non-notification factoring arrangements.[10]

Originally the industry took physical possession of the goods, provided cash advances to the

producer, financed the credit extended to the buyer and insured the credit strength of thebuyer.[11]In England the control over the trade thus obtained resulted in anAct of Parliamentin1696 to mitigate themonopoly powerof the factors. With the development of larger firms whobuilt their own sales forces, distribution channels, and knowledge of the financial strength oftheir customers, the needs for factoring services were reshaped and the industry became morespecialized.

By the twentieth century in the United States factoring was still the predominant form offinancing working capital for the then high growth rate textile industry. In part this occurredbecause of the structure of the US banking system with its myriad of small banks and consequentlimitations on the amount that could be advanced prudently by any one of them to a firm .[12]In

Canada, with its national banks the limitations were far less restrictive and thus factoring did notdevelop as widely as in the US. Even then factoring also became the dominant form of financingin the Canadian textile industry.

Today factoring's rationale still includes the financial task of advancing funds to smaller rapidlygrowing firms who sell to larger more creditworthy organizations. While almost never takingpossession of the goods sold, factors offer various combinations of money and supportiveservices when advancing funds.

Factors often provide their clients four key services: information on the creditworthiness of theirprospective customers domestic and international, and, in nonrecourse factoring, acceptance of

the credit risk for "approved" accounts; maintain the history of payments by customers (i.e.,accounts receivable ledger); daily management reports on collections; and, make the actualcollection calls. The outsourced credit function both extends the small firms effectiveaddressable marketplace and insulates it from the survival-threatening destructive impact of abankruptcyor financial difficulty of a major customer. A second key service is the operation ofthe accounts receivable function. The services eliminate the need and cost for permanent skilledstaff found within large firms. Although today even they are outsourcing such backofficefunctions. More importantly, the services insure the entrepreneurs and owners against a majorsource of a liquidity crises and their equity.

In the latter half of the twentieth century the introduction of computers eased the accountingburdens of factors and then small firms. The same occurred for their ability to obtain informationabout debtors creditworthiness. Introduction of the Internet and the web has accelerated theprocess while reducing costs. Today credit information and insurance coverage is available anytime of the day or night on-line. The web has also made it possible for factors and their clients tocollaborate in realtime on collections. Acceptance of signed documents provided by facsimile asbeing legally binding has eliminated the need for physical delivery of originals, therebyreducing time delays for entrepreneurs.

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By the first decade of the twenty first century a basic public policy rationale for factoringremains that the product is well suited to the demands of innovative rapidly growing firmscritical to economic growth.[13]A second public policy rationale is allowing fundamentally goodbusiness to be spared the costly management time consuming trials and tribulations ofbankruptcy protection for suppliers, employees and customers or to provide a source of funds

during the process of restructuring the firm so that it can survive and grow.

Reason

Factoring is a method used by some firms to obtain cash. Certain companies factor accountswhen the available cash balance held by the firm is insufficient to meet current obligations andaccommodate 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 simplybecause this is the historic method of finance. The use of factoring to obtain the cash needed toaccommodate a firms immediate cash needs will allow the firm to maintain a smaller ongoingcash balance. By reducing the size of its cash balances, more money is made available for

investment in the firms growth. Debt factoring is also used as a financial instrument to providebetter cash flow control especially if a company currently has a lot of accounts receivables withdifferent credit terms to manage. A company sells its invoices at a discount to their face valuewhen it calculates that it will be better off using the proceeds to bolster its own growth than itwould be by effectively functioning as its "customer's bank."[14]Accordingly, factoring occurswhen the rate of return on the proceeds invested in production exceed the costs associated withfactoring the receivables. Therefore, the trade off between the return the firm earns oninvestment in production and the cost of utilizing a factor is crucial in determining both theextent 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 acash balance on hand, and to use such methods as factoring, in order to enable them to covertheir short term cash needs in those periods in which these needs exceed the cash flow. Eachbusiness 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 handduring periods of low cash flow.

Generally, the variability in the cash flow will determine the size of the cash balance a businesswill tend to hold as well as the extent it may have to depend on such financial mechanisms asfactoring. Cash flow variability is directly related to 2 factors:

1. The extent cash flow can change,2. The length of time cash flow can remain at a below average level.

If cash flow can decrease drastically, the business will find it needs large amounts of cash fromeither 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 anothersource (cash balances or a factor) to cover its obligations during this time. As indicated, the

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business must balance theopportunity costof losing a return on the cash that it could otherwiseinvest, against the costs associated with the use of factoring.

The cash balance a business holds is essentially a demand for transactions money.As stated, thesize 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 thebusiness in deciding the size of the cash Balance it wants to maintain on hand is similar to thedecision it faces when it decides how much physical inventory it should maintain. In thissituation, the business must balance the cost of obtaining cash proceeds from a factor against theopportunity cost of the losing the Rate of Return it earns on investment within its business.[15]

How does international factoring work?

There is nothing complex about factoring. It is simply a unique package of services designed toease the traditional problems of selling on open account. Typical services include investigatingthe creditworthiness of buyers, assuming credit risk and giving 100% protection against write-

offs, collection and management of receivables and provision of finance through immediate cashadvances against outstanding receivables.

When export factoring is carried out by members of FCI, the service involves a five or six stageoperation.

The exporter signs a factoring contract assigning all agreed receivables to an exportfactor. The factor then becomes responsible for all aspects of the factoring operation.

The export factor chooses an FCI correspondent to serve as an import factor in thecountry where goods are to be shipped. The receivables are then reassigned to the importfactor.

At the same time, the import factor investigates the credit standing of the buyer of theexporter's goods and establishes lines of credit. This allows the buyer to place an order onopen account terms without opening letters of credit.

Once the goods have been shipped, the export factor may advance up to 80% of theinvoice value to the exporter.

Once the sale has taken place, the import factor collects the full invoice value at maturityand is responsible for the swift transmission of funds to the export factor who then paysthe exporter the outstanding balance.

If after 90 days past due date an approved invoice remains unpaid, the import factor willpay 100% of the invoice value under guarantee.

Not only is each stage designed to ensure risk-free export sales, it lets the exporter offer moreattractive terms to overseas customers. Both the exporter and the customer also benefit byspending less time and money on administration and documentation. In all cases, exporters areassured of the best deal in each country. This is because export factors never appoint an importfactor solely because the company is a fellow member of FCI. Import factors are invited tocompete for business and those with superior services are selected.

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In some situations, FCI members handle their client's business without involving another factor.This is becoming more common in the European Union where national boundaries aredisappearing. However FCI members conduct their business, one thing remains certain. Theiraim is to make selling in the complex world of international trade as easy for clients as dealingwith local customers.

Differences from bank loans

Factors make funds available, even when banks would not do so, because factors focus first onthe credit worthiness of the debtor, the party who is obligated to pay the invoices for goods orservices delivered by the seller. In contrast, the fundamental emphasis in a bank lendingrelationship is on the creditworthiness of the borrower, not that of its customers. While banklending is cheaper than factoring, the key terms and conditions under which the small firm mustoperate differ significantly.

From a combined cost and availability of funds and services perspective, factoring creates wealth

for some but not all small businesses. For small businesses, their choice is slowing their growthor the use of external funds beyond the banks. In choosing to use external funds beyond thebanks the rapidly growing firms choice is between seeking venture capital (i.e.,equity)or thelower cost of selling invoices to finance their growth. The latter is also easier to access and canbe obtained in a matter of a week or two, whereas securing funds from venture capitalists cantypically take up to six months. Factoring is also used asbridge financingwhile the firm pursuesventure capital and in conjunction with venture capital to provide a lower average cost of fundsthan equity financing alone. Of course one needs to note that Equity capital has the highest costin the long run, as a firm needs to demonstrate higher return on investment for its shareholdersFirms can also combine the three types of financing, angel/venture, factoring and bank line ofcredit to further reduce their total cost of funds whilst at the same time improving cash flow.

As with any technique, factoring solves some problems but not all. Businesses with a smallspread between the revenue from a sale and the cost of a sale, should limit their use of factoringto sales above theirbreakevensales level where the revenue less the direct cost of the sale plusthe cost of factoring is positive.

While factoring is an attractive alternative to raising equity for small innovative fast-growingfirms, the same financial technique can be used to turn around a fundamentally good businesswhose management has encountered a perfect storm or made significant business mistakes whichhave made it impossible for the firm to work within the constraints of their bankcovenants.Thevalue of using factoring for this purpose is that it provides management time to implement the

changes required to turn the business around. The firm is paying to have the option of a futurethe owners control. The association of factoring with troubled situations accounts for the halftruth of it being labeled 'last resort'financing. However, use of the technique when there is only amodest spread between the revenue from a sale and its cost is not advisable for turnarounds. Norare turnarounds usually able to recreate wealth for the owners in this situation.

Large firms use the technique without any negative connotations to show cash on their balancesheet rather than an account receivable entry, money owed from their customers, particularly

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when these show payments being due for extended periods of time beyond the North Americannorm of 60 days or less.

Invoice sellers

The invoice seller presents recently generated invoices to the factor in exchange for an amountthat is less than the value of the invoice(s) by an agreed upon discount and a reserve. A reserve isa provision to cover short payments, payment of less than the full amount of the invoice by thedebtor, or a payment received later than expected. The result is an initial payment followed by asecond one equal to the amount of the reserve if the invoice is paid in full and on time or a creditto the account of the seller with the factor. In an ongoing relationship the invoice seller will gettheir funds one or two days after the factor receives the invoices. Astute invoice sellers can use acombination of techniques to cover the range of 1% to 5% plus cost of factoring for invoicespaid within 50 to 60 days or more. In many industries, customers expect to pay a few percentagepoints higher to get flexible sales terms. In effect the customer is willing to pay the supplier to betheir bank and reduce the equity the customer needs to run their business. To counter this it is a

widespread practice to offer a prompt payment discount on the invoice. This is commonly set outon an invoice as an offer of a 2% discount for payment in ten days. {Few firms can be reliedupon to systematically take the discount, particularly for low value invoices - under $100,000 -so cash inflow estimates are highly variable and thus not a reliable basis upon which to makecommitments.} Invoice sellers can also seek a cash discount from a supplier of 2 % up to 10%(depending on the industry standard) in return for prompt payment. Large firms also use thetechnique of factoring at the end of reporting periods to dress their balance sheet by showingcash instead of accounts receivable. There are a number of varieties of factoring arrangementsoffered to invoice sellers depending upon their specific requirements. The basic ones aredescribed under the heading Factors below.

Factors

When initially contacted by a prospective invoice seller, the factor first establishes whether ornot a basic condition exists, does the potential debtor(s) have a history of paying their bills ontime? That is, are they creditworthy? (A factor may actually obtain insurance against the debtors

becoming bankrupt and thus the invoice not being paid.) The factor is willing to considerpurchasing invoices from all the invoice sellers creditworthy deb tors. The classic arrangementwhich suits most small firms, particularly new ones, is full service factoring where the debtor isnotified to pay the factor (notification) who also takes responsibility for collection of paymentsfrom the debtor and the risk of the debtor not paying in the event the debtor becomes insolvent;i.e., nonrecourse factoring. This traditional method of factoring puts the risk of non-paymentfully on the factor, except if the reason for the factor's failure to collect is not related to thefinancial inability of the account debtor to pay, the sole risk assumed by a nonrecourse factor. Ifthe debtor cannot pay the invoice due to insolvency, it is the factor's problem to deal with and thefactor cannot seek payment from the seller. The factor will only purchase solid credit worthyinvoices and often turns away average credit quality customers. The cost is typically higher withthis factoring process because the factor assumes a greater risk and provides credit checking andpayment collection services as part of the overall package. For firms with formal management

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structures such as a Board of Directors (with outside members), and a Controller (with aprofessional designation), debtors may not be notified (i.e., non-notification factoring). Theinvoice seller may not retain the credit control function. If they do then it is likely that the facto