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How Does Factoring Work?


How Does Factoring Work?

Factoring Defined

For above four hundred years, businesses have been making use of factoring. Though it is often referred to as a loan, in fact it is not, as you’ll know on understanding how does factoring work.  Actually factoring refers to a business transaction that allows a business to sell its financial receivables to an intermediary, known as a “factor,” who pays the business directly, usually in the form of working capital, enabling the business to expand its activities. The business sells its financial receivables at certain discount.

How does factoring help businesses?

Businesses are encouraged to practice factoring as it enables them to get finance without any need to prove their credit worthiness that can be quite challenging, especially under tough economic circumstances. Factoring, needing no business plan or bank statements, is more convenient and quicker than availing a loan from any bank. In effect, factoring allows businesses to get rid of finance receivables that are most often a big source of irritation for a lot of business executives. On selling a product or a service, the businesses have to wait, at times for months, to get their bills paid. Added to that is the likely risk of the buyer not paying those bills.

Factoring allows the business to get money immediately. On handing over your receivables to a factor, you get paid in advance to the extent of seventy to ninety percent of the amount of receivables. The factor charges a nominal fee of two to three percent. The balances of funds are released by the factor on receiving full payment against receivables. That helps business to have improved cash flow, allowing it to make further investments, helping its growth.

Normally, the fee charged by the factor, also called discount, is proportionate to how old the receivable is. The older it is, the more is the fee. Majority of factors would not accept receivables that are more than ninety days old.

Now that we know how does factoring work, we can list its advantages. BusinessFinance.com lists the following reasons that prompt businesses to approach a factor:

It works as a means of additional working capital

It relives them from the responsibility of collecting funds from customers, especially from those who are not likely to pay in time.

  1. Businesses can book more orders.
  2. It works as a flexible funding system that increases with sales.
  3. It allows you to derive discount benefits from vendors.
  4. You can easily get finance for paying wages and taxes.
  5. You can offer credit to your bigger customers.
  6. It enables you to buy additional machinery or buildup your inventory.

Important drawbacks

The practice of factoring has drawbacks for both, the business and the factor itself.  The business owner needs to pay fee and other charges and it is not unusual that at times for these expenses to be more than the cost of availing bank loans. The factor is exposed to the risk of bad debt as a result of having got bad receivables or fraud by way of fake invoices.

How Does Term Life Insurance Work?

How Does Term Life Insurance Work?

Getting a Term Life Policy

Term policies make a very viable option for people looking for a reasonably priced life insurance policy. You may go online or call upon a few insurance agents to compare the expense payable towards premiums and also the amount of money that the beneficiary would get in the unfortunate event of your premature death.  You may not necessarily be required to undertake a complete medical examination but the insurance company would ask you question pertaining to health check up records. Before you go ahead with such a policy you should know how does term life insurance work.

Basics of the Policy

You would understated that a term life insurance means that you are provided coverage for a limited period of time that can vary from one to twenty years as per the policy you may chose to have. Should you fail to pay premium, the policy naturally gets cancelled. If you expire at some stage when the policy is still live and valid, your nominated beneficiary is eligible to get the death befit as specified in the policy. For instance you may have an insurance coverage of $150, 000 for a term of ten years and you unexpectedly die in the eighth year then the beneficiary would get the total amount of $ 150,000. However, if you had not paid your premiums, you policy would be treated as cancelled before the expiry of the term. Since the insurance company doesn’t expect you to expire through the duration of the term, it charges you low premiums, which are affordable. This is an important aspect of knowing how does term life insurance work.

Reaching the End of the Term

As the term of the policy is completed, it gets expired and the beneficiaries are not entitled to obtain anything. At that stage the insured has two options. One is to get the policy renewed for additional term by paying higher amount as premium, as with growing years, the risk of the insurance company increases and so does the premium. Yet, certain policies don’t offer this facility of extending the term of the policy after the insured has reached a specific age. Generally there is no guarantee of getting such policies renewed. The other option is to change the policy to a permanent life insurance policy. You have to ask for this conversion prior to the expiry of your present policy. Though the amount of coverage remains unchanged, you are required to pay higher premiums. You are allowed to keep the policy alive for as long as want, irrespective of your state of health and age provided you keep paying the premiums. That makes another important point for understating how does term life insurance work.

Other Options Needing Consideration

Though term life insurance is an option, you may consider other options available prior to buying a policy. The two other popular options are offered by way of universal and whole life policies.  Both these policies are permanent.  On opting for a whole life policy you also build up cash value, allowing you to procure loan by offering cash value as collateral to the insurance company. In case of death of the insured, the beneficiaries are guaranteed to get death benefits, minus the loan amount, if any.  Universal life policy is akin to whole life with a few differences. For instance, it allows you to pay bigger premiums, enabling you to quickly accumulate your cash value. You may not pay premiums when you have built up sufficient cash value to cover your premiums. It helps discussing various aspects with a reliable and experienced agent before making a final decision on the policy.

The Best Life Insurance Policies

Buying a life insurance product can be as confusing as any other product due availability of large variety of products. It becomes challenging to decide the amount of insurance, apart from the kind of policy one should buy. Then, everybody has its own opinion as to which could be the best life insurance policies. Though one can approach a professional reputed advisor, there is a lot of information available on the Internet to help consumers have an understanding the best life insurance policies.

History

It is believed that the concept of life insurance was first developed during Roman times in the guise of “Burial Clubs” as Romans thought that the dead needed a decent burial, involving profligate ceremonies in honor of the   dead. In order to facilitate those ceremonies they made contributions to burial clubs. On the death of a member, the club took the responsibility of their burial and at times gave financial assistance to the family of the deceased. The present form of life insurance came into being in England in the seventeenth century when underwriters would insure people for financial benefits. Subsequently, the United States too followed the practice, leading to birth of twenty different insurance companies by 1837.

Types

Basically, there are five types of life insurances namely, Single Premium Life, Term Life, Whole Life, Universal Life and Variable Life insurance.

On buying a single premium life insurance, the insured needs to pay the premium fee only once to get a fully paid policy. The insurance company considers it as a long-term policy and collects a one time payment.

Term life insurance policies are available with a maturity term of 1, 5, 10, 15, 20 and 30 years. Term life insurance guarantees to pay a predefined sum of money to the beneficiaries of policyholder if the policyholder dies before the expiry of the term of the policy.

Whole life insurance provides the insured lifetime coverage or till reaching an age of hundred years. The premiums are generally high as only a part of the same go towards insurance expenses and the rest gets accumulated in the cash account of the policy.

Universal life insurance is quite akin to whole life but part of premiums is invested in market instruments rather than the stock market.

Another form of whole life insurance is variable life insurance that allows you to choose where the investment part should be invested.

Professionals’ Opinion

Specialists of Smart Money recommend term life insurance to be the best life insurance policies as it is the most economical. Males who do not smoke can have policy worth a million dollars on paying an annual premium of nearly $2,600. The policyholders need to pay for a chosen period of time. If you have dependents, you may buy a policy lasting for 20-30 years. In the absence of any dependents having an insurance policy is no more priority as the main purpose of having one is to make provision of some financial support for dependents.

Specialists at Budget Life consider it a better idea to invest in a whole life policy. They recommend investing ten percent of your portfolio in insurance policies as stock markets are rather too fluctuating at times. A whole life insurance provides cover for the entire life, irrespective of the age on death.  A part of the payment that you make is invested in a tax deferred cash account. Should you decide to cancel your policy, you are eligible to get back whatever you would have paid towards your policy. This is not so in case of term life insurance. Another benefit is that you get loans against the cash value at reasonable rate of interest that is deducted from the policy in case of your death.

Warning

Term life insurance has some drawbacks. If you want to buy another policy at the expiry of the present one, you may find it difficult to get one on getting older. Another is that you don’t get paid anything at its expiry or on cancelling your policy. One would think that all the money got wasted. However, such a policy is highly affordable, leaving you with many opportunities of making alternate additional investments and get benefitted.

Benefits

Yet, there are many benefits of buying life insurance.  Realization of having provided for your family clearly demonstrates your love for them. Having a substantial life insurance policy can help paying debts after your death. For example, your spouse could pay the home loan in one go rather than making monthly mortgage payments. Having a policy of large amount enables the family to invest money smartly and live comfortably with the interest.

Now that you are aware of the benefits and drawbacks of different kinds of policies you can take time to decide the best life insurance policies to suit your requirements.

Whole Life Insurance Explained

Lest you should remain ignorant, you’ll find here a whole life insurance explained. A whole life insurance policy is a kind of insurance designed to provide cover during your lifetime. Most often, you are required to pay the same amount of premiums all through its validity. Moreover, the younger you are at the time of buying such a policy, the lower is the premium payable.

Significance

Whole life policies are structured to grow cash value, which is exempted from income tax, and are guaranteed to offer benefit in case the insured party dies when the policy is still in force.

Considerations

A whole life policy can be treated like an investment because of its feature of cash value. Though you are required to pay more premiums, compared to term life insurance, you are allowed to borrow against the policy against its cash value buildups.

Effects

Even if you had borrowed funds from your cash value, your insurance remains intact. It simply means that even if you die, after having borrowed funds, your beneficiaries are entitled to get an amount equal to the face value minus the amount you borrowed against cash value of your policy.

Advantages

As the name suggests, a whole life insurance policy offers coverage during your complete lifetime. It guarantees some payment provided the premiums have been paid up-to-date. Additionally, it also builds cash value that you may use during your lifetime. On its surrender, you can get its cash value.

Disadvantages

Compared to term life insurance, a whole life insurance is costlier as it guarantees some kind of payment whether it’s by way of its face value or cash value on surrendering the policy after its tenure is over. It can be additionally costlier when you allow the entire policy to lapse without redeeming cash value.

What is the difference in term and whole life insurance?

On considering buying a life insurance, which offers your beneficiaries with death benefits in case of your sudden death, you’ll find two most popular kinds of insurances, namely the term life and whole life insurance. Though both offer the said benefit, they are different in many ways like the terms of coverage and costs. For instance, a whole life insurance policy offers cash value that the term policy doesn’t. Therefore, before making a final choice, you would do well to understand what is the difference in term and whole life insurance.

Coverage Term

A whole life insurance policy lasts for your entire lifetime. Insurance companies work out the cost of such policies assuming an average lifespan of hundred years for humans. Once the duration of the policy is over, you can receive the amount for which you had insured even when you are living.

A term life insurance policy provides coverage for a specified number of years. You may buy such a policy with a coverage period extending from just five to thirty years. Many opt for this kind of insurance with a coverage period of twenty years when they have young children, enabling them to get some financial help on their premature death.

Cash Value

A part of the premium paid for buying a whole life insurance policy goes towards the insurance and the balance is diverted to a cash account which keeps growing with time. The contract is designed in such a manner that on reaching an age of hundred years, the cash value equals the insurance value. This kind of policy also allows you to take out cash from your policy before it has matured and take loans against the same. On the other hand, in case of term life insurance, the entire premium that you pay goes towards your life insurance cover, meaning there’s no benefit of cash account and therefore, you are not permitted to take any loan against that policy. When it comes to understanding what is the difference in term and whole life insurance this is the key difference.

Premiums

On buying a whole life insurance policy, you may pay the entire premium in one stroke or decide to make regular contributions towards premiums. When you opt to keep making regular payments towards your premiums, the amount of premiums remain unchanged, meaning during the entire duration of the whole life insurance policy you’ll be required to pay the same  amount regularly till you are hundred years of age. In case of a term life insurance policy, you are required to pay premium amounts for the duration of policy and are generally renewed every year. With your growing years, the amount of premiums also grows up, meaning they are not even as in case of whole life insurance policy.

Other Considerations

As you can probably guess the amount payable in case of term life insurance is lower than the whole life insurance as you’ll be paying for a shorter, chosen timeframe and you don’t pay towards cash account. Another important consideration is the age at which you decide to purchase a policy. Though the payable premiums in case of a whole life policy remain unchanged, if you purchase it at a younger age, the amount of premium is low than if your purchase it later in life. So, if you purchase a term life insurance policy later in life, it may cost you more than a whole life policy purchased during your younger age.

Having known what is the difference in term and whole life insurance, you may opt for term life insurance to take care of financial requirement of your young ones, in case of your premature death or go for whole life insurance if you wish to provide assets to your children or create funds for your retired life.

What Is the Cash Surrender Value of a Term Life Insurance Policy?

What Is the Cash Surrender Value of a Term Life Insurance Policy

Though most of the term life insurance policies do not include cash values, certain types of such policies do provide cash out options when the term of the policy is over. Such a type of an insurance policy enables you to get cash at the termination of the policy. You should understand the working and what is the cash surrender value of a term life insurance policy.

Identification

Term life insurance policy offering return on premium is an extraordinary kind of life insurance. If you intend buying a policy with this feature, it must be mentioned at the time of buying your term life insurance policy. Some companies have a provision as an amendment to the basic policy, allowing the policy to generate cash value that keeps accumulating during the duration of the policy.

However, the accumulated funds remain with the insurance company and policyholder is not permitted to utilize the same.  After the term of the policy is over, the policyholder is refunded all the payments made through premiums along with the predefined interest as per the rate selected by the policyholders at the time of buying the policy.

Benefits

An important benefit of special term life insurance that includes cash return on premium is that your insurance premiums don’t get wasted. Apart from offering the benefit of a life insurance policy during its tenure, the insured, on the maturity of the policy, also gets back the entire amount that they would have paid towards the policy. The amount so received can be utilized for buying another policy or could be invested in any other preferred manner.

Drawbacks

The drawback of such a term life policy offering return on investment is that the amount of payable premiums is at least twice that of a usual term life policy. Other than that, the interest you get on your return of premium is generally less than what you may get by investing your funds in other money market instruments or bank CDs.

Considerations

You need to weigh your options when considering buying such special policy. You should calculate if you’ll be able to earn an interest amount equal to or more than the amount of return of premium by investing your money in alternate options of investment, like bank CDs, fixed annuity or any money market instrument. Here’s an example. Let’s assume that the cost of buying this kind of a policy is $60/month and you get back $900 from the insurance company when the term of your policy ends. If you think that on buying the usual term policy and making adequate investments that pay you an amount equal to or more than $900, the amount that the insurance company would pay you on buying a policy with return of premium feature, you should prefer buying a normal term life policy. An important consideration here is your acumen to simultaneously manage another investment. You’ll appreciate that the return on premium characteristic works as a forced saving plan for you in case you are not confident of choosing an alternate investment and maintaining it for offsetting the expense of a common term insurance. On knowing what is the cash surrender value of a term life insurance policy, you can make a more calculated decision.

How to Get a Student Car Loan?

Students are generally keen to have a car of their own but find it difficult to locate a financier for the purpose.  How to get a student car loan isn’t all that difficult to understand provided the student can devise a financial plan for paying back that loan in time. Here is how they may proceed:

1. At the outset they need to open a savings account with a bank if they don’t have one already.  This helps building their banking history. Any financier would like to ensure that the borrower knows to handle funds before offering any loan.

2.  You should inquire your credit union or the bank if they provide car loans to students. It is recommended to approach the very lender who is enjoying the patronage of your parents. This is of great help provided your parents have a good credit history.

3. The nest step for how to get a student car loan is to fill up the loan application. Usually, it will require a recommendation from the bank with which you opened a savings account and or a proof from your college certifying that you are enrolled with them. You should surely include in the employment section if you are looking forward to getting apart time job.

4. Do not hesitate to ask for some perks from your lender. The lender may offer you a lower rate of interest or agree to extend the repayment period as you do not have a full time job yet.  Usually, lenders would give further reduction in rate of interest if you get the loan cosigned by your parents.

5.  Go over the loan offer and check if you can accommodate the additional expense in your budget. Don’t overlook the fact that you’ll need to keep provision for fuel, insurance and other maintenance expenses.

6. Having known how to get a student car loan, you can get one but ensure to pay your loan installments regularly without any delay. In all probability this would be your first loan and failure to pay your loan can severely affect your credit history. On the other hand making timely payments helps establishing good credit store, facilitating getting future loans at better rates of interest.