In this series, we have been discussing common terms associated with selling a structured settlement. The intent of the series is to provide sellers with information to better equip them when dealing with potential buyers. We have discussed the future value, present value, and discount value of structured settlements and how each term relates to selling a structured settlement. The final term for discussion will be factoring and its significance to the lump sum a potential buyer will offer. First, let’s discuss what factoring is all about. It could be that you relate factoring to the business world. This is similar to factoring which is used in businesses when they need to maintain their cash flows. An option that has been used for years by businesses is to sell their accounts receivables to another company as an investment in exchange for a lump sum to be used to continue operations. For example, let’s say a company performs monthly custodial services for a government agency and the company is currently owed $50,000 for services. The custodial company can wait for the check to come or it can sell that future payment to a factoring company. The factoring company will purchase that future payment at a discount and offer the custodial company a check immediately for $35,000. Unfortunately, the money they received today is less than the money they would have received if they had waited for the check, but it could be that they couldn’t afford to wait because they had immediate expenses that had to be met today. The same logic applies when you consider selling a structured settlement. You will receive less today for payments you will receive in the future.
Factoring by definition is what determines the amount you can expect to receive from a potential buyer because it is the process used to value structured settlement payments. A potential buyer will evaluate several key factors in determining the value. These factors include the total value of the annuity payments, the remaining number of payments, the safety of the asset, and whether it is a full or partial sale. For example, let’s say you have a structured settlement and you decide to sell all of the remaining payments to the same type of company or individual. After the sale is complete, the settlement buyer will begin to receive the structured settlement money that the seller was previously receiving. In exchange the seller has been traded the payments for a lump sum payment minus the discount rate. Hopefully, this series has been successful in providing helpful information to use when considering selling all or part of a structured settlement.
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