Which of the following statements about factoring is true?
A) The firm, not the factor, bears the risk of collecting bad receivables in a factoring arrangement.
B) Factoring involves the outright sale of a firm's accounts receivable to the factor.
C) The borrowing firm is able to obtain a greater advance against inventory in a factoring arrangement than in a typical line of credit secured by accounts receivable.
D) Factoring firms sell the receivables of other firms.

Question

Quizplus · Accepted Answer

Factoring involves the outright sale of a firm's accounts receivable to the factor. This means that the factor assumes the risk of collecting bad receivables and provides cash upfront to the firm. Options A and C are incorrect because factoring does transfer the risk of bad debt collection to the factor, and the advance against inventory is typically lower in factoring arrangements. Option D is incorrect because factoring firms purchase the receivables of other firms, not sell them.

Which of the Following Statements About Factoring Is True