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CA Intermediate · Financial Management and Strategic Management · Types of Financing

Which statement about a factoring arrangement is most accurate, in the context of receivables financing?

In non-recourse factoring, the factor takes on the risk of customer default on approved receivables, so it bears the bad debt loss. In recourse factoring the risk stays with the client. Factoring is a short-term receivables finance tool, and the factor usually handles collection.

  1. AIn non-recourse factoring, the factor bears the loss if the customer fails to pay due to insolvency, subject to the approved credit limitCorrect
  2. BIn recourse factoring, the factor bears all bad debt losses
  3. CFactoring is a long-term source for financing fixed assets
  4. DFactoring always requires the client to retain collection responsibility

Explanation

In non-recourse factoring the factor assumes the credit risk on approved receivables, so bad debt loss falls on the factor. In recourse factoring the client bears the risk of non-payment. Factoring finances receivables, which is short-term, and the factor usually takes over collection and ledger administration.

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