CA Intermediate · Financial Management and Strategic Management · Management of Receivables
Which one of the following is a feature of factoring without recourse, as distinct from factoring with recourse?
In factoring without recourse, the factor bears the loss when an approved customer fails to pay for credit reasons. The client is not required to refund the advance, unlike in recourse factoring where the client keeps the bad debt risk.
- AThe factor bears the loss if the customer fails to pay due to credit reasonsCorrect
- BThe client must repay the factor for any unpaid invoices
- CThe factor charges no commission for credit risk
- DThe client continues to bear the risk of bad debts
Explanation
In non-recourse factoring the factor assumes the credit risk on approved invoices and absorbs bad debt losses. In recourse factoring, the client bears that risk and must refund unpaid advances. The non-recourse arrangement usually carries a higher commission because of the risk taken.
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