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CMA Intermediate · Financial Management and Business Data Analytics · Financing Working Capital

Sunrise Textiles sells goods on credit and enters into a factoring arrangement. Under a 'non-recourse' factoring arrangement, which party bears the loss if a customer fails to pay because of insolvency?

The factor bears the loss. In non-recourse factoring, the factor takes on the credit risk of approved receivables, so the seller need not repay the advance when a customer becomes insolvent. Recourse factoring is the opposite arrangement, where the seller bears the default risk.

  1. ASunrise Textiles, which must refund the advance to the factor
  2. BThe factor, who absorbs the credit loss on approved debtsCorrect
  3. CThe customer's bank, which guarantees the invoice
  4. DThe Reserve Bank of India, through a credit guarantee

Explanation

In non-recourse factoring the factor assumes the credit risk on approved receivables. The client is not required to refund the advance if the debtor defaults due to insolvency. Option A describes recourse factoring, which is why it is wrong.

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