Question

A firm needs to raise cash and at the same time reduce the level of its accounts receivable. This firm would likely benefit most by _______________________.

A. Obtaining an unsecured short-term loan.

B. Applying for a committed line of credit.

C. Assigning its receivables on a short-term loan.

D. Factoring its receivables.

E. Securing any short-term credit with a blanket inventory lien.

Answer 1

Anwer is Factoring its receivables.

Let me explain what is factoring, factoring is nothing but if company or corporates want to gernate cash and same time they want to reduce their debtors risk they can opt Factoring service.

Who provides factoring service : Usually banks example, HSBC, Barclays etc

On what basis banks provides money : based on the Accounts receivable balance, (Usually MNC opt this service)

What benefit Banks gets if they factor : we know that factoring is a third party service so they will charge certain amount for this risky service.(Term called factoring discount)

For example customer debtors balance is $ 303 Million bank will provide $ 300 Million to corporate or company. once customer pay $ 303 Million, company will pay $ 303 to Banks (or Factoring), here bank earned $3 Million.

Kindly let us know if further query.