Financial Management and Business Data Analytics · Receivable Management

Factoring and Receivables Financing for CMA Intermediate

Updated 10 October 2026 · Fact-checked

Factoring is the sale or assignment of trade receivables to a factor, who advances cash (usually 70% to 90% of invoice value), collects the debts and may bear bad-debt risk. To solve numericals, compare the factoring cost (commission, interest) with savings (admin cost, bad debts, financing cost on freed funds).

Understand Factoring and Receivables Financing

A business that sells on credit has cash locked up in receivables until customers pay. Factoring releases this cash early. The firm (client) sells or assigns its invoices to a financial intermediary called the factor. The factor pays an advance against the invoices, collects from the customers and pays the balance to the client later.

A factor usually offers three services: finance (advance against invoices), collection and sales ledger administration, and credit protection (cover against bad debts). How many of these you get depends on the type of factoring.

The main split is by recourse. In with recourse factoring, the client bears the bad-debt risk. If a customer does not pay, the factor takes the money back from the client. In without recourse (non-recourse) factoring, the factor bears the credit loss on approved debts, so the commission is higher. Other types are disclosed (customers are told the debt is assigned) and undisclosed or confidential (customers are not told), plus advance and maturity factoring. In maturity factoring the factor pays only on collection or on a guaranteed date.

Invoice discounting is different. The client keeps the sales ledger and collection work, usually confidentially, and only borrows against invoices. Bills discounting relates to bills of exchange accepted by the customer. The bank discounts the bill, and the drawer remains liable if the drawee dishonours it. Factoring covers book debts without bills, and includes services beyond finance.

Forfaiting is for export receivables. A forfaiter buys medium-term export bills or promissory notes, usually avalised by a bank, without recourse to the exporter. The exporter gets cash at a discount and passes on country and credit risk.

Key rules to remember

Advance by factor: Advance = Invoice value × Advance % (after any reserve/factor holdback); The reserve (balance) is paid to the client on collection, less charges.
Factoring commission: Commission = Invoice value × Commission rate %; Charged on the full invoice value, not only on the advance.
Interest on advance: Interest = Advance × Rate % × Days ÷ 365; Charged on the advance actually drawn. If commission is deducted upfront, charge interest on the advance left after that deduction. Interest deducted upfront is not itself charged with interest unless the question says so. Use the days or rate the question gives.
Net benefit of factoring: Net benefit = Savings (admin cost + bad debts avoided + financing cost saved) − Factoring cost (commission + interest); Positive means accept factoring. Compare on the same annual basis. Financing cost saved is on the fall in the firm's own investment in receivables, that is, old receivables less (new receivables − advance).
Effective cost of factoring: Effective cost % = (Commission + Interest − Savings in administration and bad debts) ÷ (Advance − Interest if deducted upfront) × 100; Savings of financing cost are not deducted, because the advance is the financing being costed. Use annual figures and compare with the bank borrowing rate.
Average receivables: Receivables = Credit sales × Collection period ÷ 365; Use 360 if the question says so.

How to solve Factoring and Receivables Financing questions

Use this order for any factoring cost-benefit question. Write a clear before and after layout.

1Note the credit sales, collection period, days in year (365 or 360) and the type of factoring (with or without recourse).
2Find the present receivables: Sales × Days ÷ Year. Under factoring, find the new receivables using the factor's reduced collection period.
3Compute the advance: Receivables × Advance %. The rest is the reserve.
4Compute factoring costs: commission on invoice value and interest on the advance for the period, on an annual basis.
5List savings: administration cost saved, bad debts avoided (only if non-recourse, and only if the question says the firm currently incurs them), and financing cost saved on the firm's reduced net investment in receivables.
6Net benefit = Savings − Costs. Also compute the effective cost % if asked.
7State the decision: accept factoring if the net benefit is positive, and mention non-financial points such as loss of customer contact.

Quickest way: Savings versus cost table

When to use it: Use it when the question asks whether to accept a factor's offer with several cost and saving items.

Draw two columns: Savings and Costs, on an annual basis.
Fill savings first: administration cost, bad debts, and interest on funds released, that is (old receivables − new net investment in receivables after the advance) × cost of funds.
Fill costs: commission on sales and interest on the advance.
Subtract, then write a one-line decision.
Check the advance, since interest is charged on the advance, not on the whole receivable.

Common mistakes in Factoring and Receivables Financing

Charging commission on the advance instead of the invoice value.
Students link all factor charges to the money lent.
Fix: Commission is on invoice value (sales factored). Only interest is on the advance.
Counting bad-debt savings under with-recourse factoring.
Students assume the factor always takes the credit risk.
Fix: Bad-debt saving arises only in without-recourse factoring. Under recourse the client still bears the loss.
Using old receivables to compute financing savings.
The collection period changes under factoring and students ignore it.
Fix: Savings come from the fall in the firm's own investment in receivables: old balance minus (new balance − advance), multiplied by the firm's cost of funds.
Treating factoring and bills discounting as the same.
Both give early cash against credit sales.
Fix: Say that factoring covers book debts and includes collection and credit services, while bills discounting is purely finance on a bill of exchange where the drawer stays liable.
Mixing 360 and 365 days or monthly and annual rates.
Rush and unit confusion.
Fix: Use the day basis given. Convert every rate and cost to an annual figure before comparing.

Worked examples

Example 1

Ravi Textiles has annual credit sales of ₹3,65,00,000 and a collection period of 60 days. A factor offers to collect in 30 days. Terms: advance 80% of receivables, interest 12% p.a. on the advance, commission 2% of sales, without recourse. The firm currently incurs bad debts of 1% of sales, which the without-recourse service will avoid. Administration cost of ₹2,00,000 a year will also be saved. The firm's cost of funds is 10% p.a. and it finances all its receivables from its own funds. Use 365 days. Should the firm accept?

Show the solution

Present receivables = 3,65,00,000 × 60 ÷ 365 = ₹60,00,000.
New receivables with factor = 3,65,00,000 × 30 ÷ 365 = ₹30,00,000.
Advance = 80% × 30,00,000 = ₹24,00,000. The firm's own investment left in receivables = 30,00,000 − 24,00,000 = ₹6,00,000.
Interest on advance = 24,00,000 × 12% = ₹2,88,000.
Commission = 2% × 3,65,00,000 = ₹7,30,000. Total cost = 2,88,000 + 7,30,000 = ₹10,18,000.
Savings: administration ₹2,00,000; bad debts 1% × 3,65,00,000 = ₹3,65,000; financing saving = (60,00,000 − 6,00,000) × 10% = ₹5,40,000. Total savings = 2,00,000 + 3,65,000 + 5,40,000 = ₹11,05,000.
Net result = 11,05,000 − 10,18,000 = +₹87,000.

Answer: Factoring saves ₹87,000 a year more than it costs, so the firm should accept the offer, subject to the assumptions that bad debts of 1% are currently incurred and avoided, and that the retained 20% is funded at 10%.

Example 2

Sharma Exports factors ₹10,00,000 of invoices with recourse. The factor advances 90% and charges 1.5% commission on invoice value, deducted upfront, and 14% p.a. interest for 60 days (365-day year) on the advance remaining after the commission is deducted. Interest is also deducted upfront. Find the net amount the firm receives now, and the total cost in rupees for the 60 days.

Show the solution

Advance = 90% × 10,00,000 = ₹9,00,000.
Commission = 1.5% × 10,00,000 = ₹15,000, deducted upfront.
Advance after commission = 9,00,000 − 15,000 = ₹8,85,000.
Interest = 8,85,000 × 14% × 60 ÷ 365 = ₹20,367 (approx.). Interest is not itself charged with interest.
Net cash now = 8,85,000 − 20,367 = ₹8,64,633.
Total cost = 15,000 + 20,367 = ₹35,367.

Answer: Net cash received now is about ₹8,64,633 and the total cost for 60 days is about ₹35,367. As this is with recourse, the firm must still refund the factor if a customer defaults.

Exam tips

Read whether the factoring is with or without recourse first. It decides whether bad-debt savings are counted.
Show a neat savings and costs table. Step marks go to each line.
For theory, give a four-line comparison of factoring versus bills discounting and of factoring versus forfaiting.
State your assumption when the question is silent, for example that charges are deducted upfront, and apply it consistently.
End numericals with a clear accept or reject decision.

Practice questions from Receivable Management

Factoring and Receivables Financing in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

CA IntermediateFactoring and Forfaiting of Receivables

Factoring and Receivables Financing: frequently asked questions

What is the difference between factoring with and without recourse?

With recourse, the client bears the loss if a customer does not pay and must refund the factor. Without recourse, the factor bears the credit loss on approved debts, so it charges a higher commission.

What is the difference between factoring and bills discounting?

Factoring deals with open book debts and usually includes collection, ledger administration and credit protection. Bills discounting is finance against a bill of exchange, and the drawer remains liable if the bill is dishonoured.

What is forfaiting?

Forfaiting is the purchase of medium-term export receivables, usually bills or notes backed by a bank guarantee, at a discount and without recourse to the exporter. It removes credit and country risk from the exporter.

How do I decide whether factoring is worth it?

Add up the annual savings in administration, bad debts and financing cost on released funds. Subtract commission and interest. If the net figure is positive, factoring is beneficial.