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CA Intermediate · Financial Management and Strategic Management · Financing of Working Capital

In a non-recourse factoring arrangement, a customer of the client firm fails to pay an approved invoice because of insolvency. Who bears the loss?

The factor bears the loss. In non-recourse factoring the factor assumes the credit risk on approved invoices, so if the customer becomes insolvent the factor cannot recover the money from the client. Under recourse factoring, by contrast, the loss would fall on the client.

  1. AThe factorCorrect
  2. BThe client firm that sold the goods
  3. CThe customer's bank
  4. DThe loss is shared equally by the client and the factor

Explanation

In non-recourse factoring, the factor takes over the credit risk on approved receivables and cannot claim the amount back from the client if the customer defaults for financial reasons. The client bears the loss only under recourse factoring. The client pays for this protection through a higher factoring commission.

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