CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Under factoring without recourse, which statement is correct?
In factoring without recourse, the factor takes over the credit risk on approved receivables and bears the loss if the customer defaults for credit reasons. The client is not required to refund advances, unlike in recourse factoring, and the factor charges a commission for assuming this risk.
- AThe factor bears the loss if the customer fails to pay due to credit reasonsCorrect
- BThe client must repay the factor if the customer defaults
- CThe factor charges no commission since risk stays with the client
- DThe factor only provides collection services and no finance
Explanation
In non-recourse factoring, the factor assumes the credit risk of approved debts, so bad-debt loss falls on the factor. Recourse factoring is where the client must refund the advance on default, which is why the second option is wrong.
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