Understanding Factoring in Finance

Questions and Answers

What is the primary role of a factor in a factoring agreement?

To conduct financial audits for the client

To provide marketing services for the client

To purchase the client's accounts receivable (correct)

To manage the client's inventory

What percentage of accounts receivable does a factor typically advance to the client upon agreement?

90% to 95%

70% to 80% (correct)

50% to 60%

80% to 90% (correct)

Which of the following is NOT a characteristic of factoring?

Initial Stock Financing (correct)

Credit Cover

Sales Ledgering

Case Advances

In factoring, who usually collects the debt from the customer?

<p>Either the factor or the client, depending on the type of factoring</p> Signup and view all the answers

What does the factor assume in a factoring agreement?

<p>The credit risk associated with the client's customers</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 purchases accounts receivables (debtors and bills receivables) of a firm, providing necessary finance for working capital.

Definition of Factoring

Defined as a continuous arrangement where a financial institution assumes credit and collection functions for clients.
The factor purchases receivables as they arise, manages sales ledgers, and performs bookkeeping duties.
Factoring represents an ongoing relationship between the financial institution (factor) and the business (client), involving accounts receivables purchased with or without recourse to the client.

Concept of Factoring

A financial institution (factor) buys accounts receivables, providing immediate cash advances up to 80-90% of the total amount.
The remaining balance (20%) is paid to the client after customer payment is received, accounting for costs.
The responsibility for debt collection can be assumed by either the factor or the client, depending on the factoring type.

Characteristics of Factoring

Credit Cover: The factor absorbs the risk, providing a safety net for the client’s credit exposure.
Cash Advances: Clients receive cash advances within 24 hours of document receipt from the factor.
Sales Ledgering: Documentation and transaction details are automatically computerized and stored for accuracy and efficiency.
Collection Service: The factor handles the collection of debts, streamlining the process for clients.

Description

This quiz covers the key concepts, definitions, and mechanisms of factoring as a financial practice. It explores how financial institutions assist businesses through the purchase of accounts receivables, the relationship established, and the benefits provided to clients. Test your knowledge of this essential financial service.