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CA Intermediate · Financial Management and Strategic Management · Management of Receivables

Under factoring, which statement distinguishes 'non-recourse' factoring from 'recourse' factoring?

In non-recourse factoring the factor bears the risk of bad debts on approved receivables, whereas in recourse factoring unpaid debts are charged back to the client. This credit-risk assumption is why non-recourse factoring usually carries a higher commission.

  1. AThe factor bears the loss from customers' bad debts in non-recourse factoringCorrect
  2. BThe client bears the loss from bad debts in non-recourse factoring
  3. CThe factor never advances funds against receivables in non-recourse factoring
  4. DThe client's customers are not notified in non-recourse factoring

Explanation

In non-recourse factoring the factor assumes the credit risk of approved debts, so bad debts are the factor's loss. In recourse factoring the client must take back unpaid debts. Hence the client bearing the loss describes recourse factoring, not non-recourse.

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