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<p><strong>(a)Continuous Arrangement between Factor and Seller, </strong></p> <p><strong>(b)Sale of Receivables to the factor,</strong></p> <p><strong>(c)Factor provides cost free finance to seller,</strong></p> <p><strong>(d)None of the above.</strong></p> <p> </p>
answer is C
NOTHING IS FREE
C is the right answer.
(c) Factor provides cost free finance to seller
Factor provides cost free finance to seller this is correct
Option C
(b)Sale of Receivables to the factor,
First, we need to Define what is the Factoring;
Factoring
Factoring is the commercial and financial relationship between a seller of business goods or services on credit to a number of domestic or international buyers and the commercial liaison (Factor) that purchases the accounts receivables evidenced through issued invoices, providing credit risk coverage, collection, sales ledger administration and advance payments to a percentage depending on the exact nature of the arrangement between the two parties (Factor and Seller).
After the Analysis and defining the Term (Factoring) now we can choose the Answer which as I think is:
(c)Factor provides cost free finance to seller,
The cause of the above answer is in the following:-
how the Factoring Companies works?!!!
Factoring companies pay based on (1) the length of time the receivables have been outstanding, (2), the number of receivables, and (3) the credit ratings of your customers. The factor will review your receivables and give you an initial amount, probably no more than80 percent on the total, within a few days. Then they will charge a fee for the actual collections of2% to6%, depending on how difficult the receivables are to collect. With the initial discount on the purchase of your receivables, and the fees, you will probably get no more than40 percent of your receivables. That's just an estimate; your costs might be different.
Hope the above answer is useful and would like your valuable reply
Thanks and Regards
Factor charges fees or buys the receivables on discounted rates, often factoring financing option is costly compare to other traditional sources of finance. So, it is not cost free finance for the organization, hence option (C) is wrong.
Correct Answer is (B) - Factor buys the receivables from the organization (Seller) after considering the credit worthiness of Seller's client.
