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Questions and Answers
What is the primary role of a factor in a factoring agreement?
What is the primary role of a factor in a factoring agreement?
What percentage of accounts receivable does a factor typically advance to the client upon agreement?
What percentage of accounts receivable does a factor typically advance to the client upon agreement?
Which of the following is NOT a characteristic of factoring?
Which of the following is NOT a characteristic of factoring?
In factoring, who usually collects the debt from the customer?
In factoring, who usually collects the debt from the customer?
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What does the factor assume in a factoring agreement?
What does the factor assume in a factoring agreement?
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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 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.
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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.
