Section A

AgriGrow Co, a large agricultural cooperative, is experiencing cash flow difficulties due to late payments from major supermarket chains. The finance director is considering either factoring or invoice discounting.

Which TWO of the following statements regarding factoring and invoice discounting are correct?

Answer options:

Factoring usually involves the factor taking over the administration of the sales ledger.

Invoice discounting provides bad debt protection (non-recourse) as a standard feature.

Invoice discounting is generally confidential, meaning customers are unaware of the arrangement.

Factoring is always cheaper than invoice discounting due to economies of scale.

How to approach this question

Distinguish between the administrative and confidentiality aspects of factoring versus invoice discounting.

Full Answer

Factoring involves outsourcing the sales ledger administration to the factor, who collects payments directly from customers. Invoice discounting is purely a financing arrangement where the company retains control of its sales ledger and collects payments itself, making it confidential.

Common mistakes

Confusing which method is confidential. Factoring is visible to customers; invoice discounting is not.

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Practice the full ACCA FM — Financial Management Practice Exam 4

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