What is factoring?

What is factoring?

• A. The outsourcing of the credit control department to a third party. The entity sells receivables to a factor for a lump sum in advance and then the factor chases payment
• B. Selling inventories
• C. Leasing assets
• D. Issuing new shares

Answer: (A)

Factoring is a financing arrangement where a business sells its trade receivables to a factor for immediate cash, and the factor takes on the task of collecting payments from customers. The firm receives a lump-sum upfront (often a percentage of the receivables’ value) and the factor then collects the debts. This improves working capital and transfers the responsibility for debt collection to the factor. It isn’t about selling inventories, leasing assets, or issuing new shares, which are different ways to raise funds. The description given matches factoring precisely: a cash advance for receivables and the factor chasing payment.

Factoring is a financing arrangement where a business sells its trade receivables to a factor for immediate cash, and the factor takes on the task of collecting payments from customers. The firm receives a lump-sum upfront (often a percentage of the receivables’ value) and the factor then collects the debts. This improves working capital and transfers the responsibility for debt collection to the factor. It isn’t about selling inventories, leasing assets, or issuing new shares, which are different ways to raise funds. The description given matches factoring precisely: a cash advance for receivables and the factor chasing payment.