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CS Professional · Strategic Management and Corporate Finance · Raising of Funds - Non Fund Based

In a without-recourse factoring arrangement, who bears the loss if the customer (debtor) fails to pay the invoice purely because of insolvency?

The factor bears the loss. In without-recourse factoring the factor buys approved receivables and assumes the debtor's credit risk, so on the debtor's insolvency the factor cannot recover the advance from the seller. Only in recourse factoring does the seller refund the amount.

  1. AThe seller of goods, who must refund the advance
  2. BThe factor, who has bought the receivable without recourseCorrect
  3. CThe seller's bank, as guarantor of the invoice
  4. DThe debtor's bank, as collecting banker

Explanation

Under non-recourse factoring the factor takes over the credit risk of the debtor's approved receivables. If the debtor becomes insolvent, the factor absorbs the loss and cannot claim the advance back from the seller. Recourse factoring would have been the case where the seller refunds.

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