CA Intermediate · Financial Management and Strategic Management · Management of Receivables
A firm uses factoring on a without-recourse basis. Which statement about this arrangement is correct?
Under without-recourse factoring, the factor bears the loss when an approved customer fails to pay because of insolvency. The seller is not liable to refund the advance, which is why this form carries a higher commission than recourse factoring.
- AThe factor bears the loss if the customer fails to pay due to insolvencyCorrect
- BThe firm bears the loss if the customer fails to pay due to insolvency
- CThe factor can claim the unpaid amount back from the firm
- DThe arrangement is possible only for export sales
Explanation
In non-recourse factoring the factor assumes the credit risk of approved debtors, so bad debt losses fall on the factor. The firm bears the loss only in recourse factoring.
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