what is discount, discounting with resourse and without resourse and their example

Expert Solution

Discounting can be defined as an arrangement between a party owing accounts receivables and the party who is willing to exchange proceeds say cash in lieu of the sundry debtors. Factor often pays a price lower than the value of the debtors as immediate funds are provided to the other party.

A discounting with recourse means that the party owing the debtors will still remain liable to pay to the other party i.e the factor in case the debtors are not realisable. In compare to non recourse discounting it is cheaper as it has added risk associated with it from the point of view of First party. Also the initial funds given against the debtors will be more compared to non recourse because the factor has added security to recover the proceeds from the party in case the debtors are non realisable.

For instance say ABC has a account receivable worth $10000. Now ABC enters into a recourse factoring with XYZ where it will receive $8000 in lieu of the account receivable. Lets the XYZ is able to recover $7000 from the receivable. Since this is a recourse arrangement ABC will be liable to pay XYZ the difference i.e $8000-$7000= $1000.

A discounting without recourse means that the risk of realisation of debtors is also transferred to the factor and the factor cannot claim any proceeds from the first party even in case of non realisation. Since there is an added risk for the factoring party the proceeds offered initially are low compared to recourse factoring.

For instance say ABC has a account receivable worth $10000. Now ABC enters into a recourse factoring with XYZ where it will receive $8000 in lieu of the account receivable. Lets the XYZ is able to recover $7000 from the receivable. Since this is a nonrecourse arrangement all the risk related to realisation will be borne by XYZ and they will not be able to recover and shortage from ABC.

jeff jeffy answered 8 months ago

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