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

Which of the following is the most appropriate description of 'factoring without recourse' in the management of receivables?

Factoring without recourse means the factor purchases the receivables and takes on the risk of customer default. If an approved debtor fails to pay, the loss falls on the factor and not on the selling firm, which is why the factor charges a higher commission for this service.

  1. AThe factor buys the receivables and bears the risk of the customer's default, so the firm has no liability if the debtor fails to payCorrect
  2. BThe factor collects the receivables but the firm bears the loss if the debtor fails to pay
  3. CThe factor only provides advisory services on credit policy and does not finance the receivables
  4. DThe firm sells its receivables to the factor but must refund the advance if the debtor delays payment

Explanation

In non-recourse factoring the factor assumes the credit risk of the approved debtors, so bad debts are borne by the factor. In recourse factoring the firm bears the loss on default, which is what options 2 and 4 describe. Option 3 describes only an advisory role, which is not factoring.

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