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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

A company sells its trade receivables to a factor under a non-recourse factoring arrangement. One of the customers whose invoices were factored becomes insolvent and cannot pay on the due date. Who bears the loss on that invoice?

The factor bears the loss. In non-recourse factoring the factor assumes the credit risk of approved receivables, so it cannot recover the advance from the seller when the customer becomes insolvent. Only under recourse factoring would the company have to bear the loss.

  1. AThe factor, because it bears the credit risk on approved receivablesCorrect
  2. BThe company, because the factor can recover the advance from it
  3. CThe customer's bankers, who are bound to pay on the customer's behalf
  4. DThe company and the factor, who share the loss equally by rule

Explanation

Under non-recourse factoring, the factor takes over the credit risk of approved debts and cannot go back to the seller for bad debts caused by customer insolvency. Recourse is available only in recourse factoring, which is why the second option is wrong. There is no rule of equal sharing.

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