CMA Intermediate · Financial Management and Business Data Analytics · Receivable Management
Under a factoring arrangement without recourse, which of the following is borne by the factor?
In non-recourse factoring the factor bears the credit risk, meaning bad debts from a customer's insolvency or inability to pay approved invoices. Commercial disputes such as quality defects, delivery disagreements and the client's production delays stay with the client, because the factor only covers credit default.
- ARisk of bad debts arising from the customer's insolvencyCorrect
- BRisk of goods being returned due to quality defects
- CRisk of disputes about delivery terms raised by the customer
- DRisk of the client's own production delays
Explanation
In non-recourse factoring the factor assumes the credit risk of approved receivables, so losses from customer insolvency fall on the factor. Disputes over quality, delivery and the client's own performance remain with the client, since the factor does not cover commercial disputes.
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