Factoring in Finance

Questions and Answers

What percentage of accounts receivable does a factor typically pay immediately upon agreement?

70%

80% (correct)

50%

90%

What is one of the main responsibilities of a factor in a factoring arrangement?

Conduct employee training for the client

Assume credit and collection functions (correct)

Provide loans without selling receivables

Present financial statements to the client

What does the factor do with the remaining balance after initial payment to the client?

Returns it to the government

Invests it in other businesses

Keeps it as profit

Pays it when the customer pays the debt (correct)

Which characteristic of factoring involves managing financial risks for the client?

<p>Credit Cover</p> Signup and view all the answers

What action is taken to ensure transactions are organized in factoring?

<p>Automated computer systems</p> Signup and view all the answers

Study Notes

Meaning of Factoring

Factoring involves selling a company's trade debts to a financial institution at a discount.
The factor, acting as an agent, purchases accounts receivables to provide immediate financing for working capital needs.

Definition of Factoring

Defined by Mr. C.S. Kalyanasundaram as a continuous arrangement where a financial institution manages credit and collection for clients.
The factor buys receivables as they arise, takes on credit loss risks, and handles sales ledgers and bookkeeping.

Concept of Factoring

Typically, the factor pays up to 80% to 90% immediately upon agreement for the accounts receivable purchased.
The remaining balance (20%), minus operating costs, is paid to the client once the customer settles the debt.
Debt collection responsibility may fall to either the factor or the client, depending on the type of factoring employed.

Characteristics of Factoring

Credit Cover: The factor mitigates the client's risk by covering credit through advance payments.
Cash Advances: Clients can receive cash advances within 24 hours of document submission.
Sales Ledgering: Transactions' details are computerized and stored efficiently, enhancing organizational record-keeping.
Collection Service: The factor may assume responsibility for collecting outstanding debts.

Description

This quiz covers the concept of factoring in finance, including its meaning and definition. Understand how factoring helps businesses manage trade debts and working capital by selling their accounts receivables. Explore the roles of financial institutions and agents in this arrangement.