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Questions and Answers
What percentage of accounts receivable does a factor typically pay immediately upon agreement?
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?
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?
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?
Which characteristic of factoring involves managing financial risks for the client?
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What action is taken to ensure transactions are organized in factoring?
What action is taken to ensure transactions are organized in factoring?
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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.
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