CA Intermediate · Financial Management and Strategic Management · Management of Receivables
A firm uses factoring on a without-recourse basis. Which statement best describes the position?
In without-recourse factoring the factor assumes the credit risk on approved receivables, so if the customer fails to pay because of insolvency the factor bears the loss. The client is not required to refund the advance, unlike in recourse factoring.
- AThe factor bears the loss if the customer fails to pay due to insolvencyCorrect
- BThe firm bears the loss on customer default
- CThe factor can recover bad debts from the firm
- DThe firm must repurchase unpaid invoices after 90 days
Explanation
In non-recourse factoring, the factor assumes the credit risk of approved debts and cannot claim from the client for customer default. Recourse factoring is the opposite, where the client bears bad debt loss.
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