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IAI Actuarial Core Principles · Business Finance · Financial instruments issued or used by companies

Which statement about invoice discounting or factoring of trade receivables is correct?

Non-recourse factoring passes the risk of customer default to the factor, normally in return for a higher fee. Recourse factoring leaves bad-debt risk with the client, and factoring generally speeds up cash receipts through partial advances rather than delaying them.

  1. AFactoring always leaves the credit risk with the client company
  2. BNon-recourse factoring transfers the risk of customer default to the factor, usually at a higher feeCorrect
  3. CInvoice discounting requires the factor to take over the sales ledger administration
  4. DThe factor advances 100% of invoice value on the invoice date with no fee
  5. Factoring reduces the company's liquidity because cash is received later

Explanation

With non-recourse factoring the factor bears bad-debt losses, and charges more for this. Recourse factoring leaves credit risk with the client. Invoice discounting is typically confidential and the client keeps ledger administration. Factors advance only a proportion (often 75-85%) and charge fees, and factoring accelerates cash rather than delaying it.

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