Question

When a firm factors its accounts receivable as opposed to pledging them, the firm will:

a.	offer the lender the accounts receivable as collateral to the loan
b.	sell the accounts receivable at a discount to the lender
c.	in all cases, remain liable for any uncollected accounts sold to the lender
d.	none of the above

Answer 1

The correct answer is Option B(sell the accounts receivable at a discount to the lender)

When a firm factors its accounts receivable as opposed to pledging them, the firm will sell the accounts receivable at a discount to the lender. The Factor bears the risk and performs credit checking. It is a considered an extremely flexible source of funds. It helps the business to shift the burden of collecting amount and saving costs by selling them to other company(the factor) and focus on the key operations of the business. It enhances the fund supply for the business too since they get funds from the factor sooner than accounts receivables. That is why business sells the receivables at a discounted price. Pledging involves offering the lender the accounts receivable as collateral to the loan.