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ACCA Applied Skills · Financial Management · Management of inventories, accounts receivable, accounts payable and cash

Which of the following is the most appropriate description of factoring with recourse?

With recourse factoring, the client keeps the bad debt risk. If a customer does not pay, the client must repay the factor for amounts advanced, whereas under non-recourse factoring the factor bears that loss.

  1. AThe factor bears the bad debt risk on the receivables it purchases
  2. BThe client keeps the bad debt risk and must repay the factor for debts that go unpaidCorrect
  3. CThe factor only collects debts and never advances finance
  4. DThe factor insures the client against all trade disputes

Explanation

With recourse, the client retains the risk of irrecoverable debts and must refund the factor for them. Non-recourse factoring transfers bad debt risk to the factor, which is why option one is wrong.

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