Which of the following is a disadvantage of factoring?

A. ensures an uneven pattern of cash flows

B . turns accounts receivable into cash quickly

C. highly expensive source of short-term financing

D. eliminates credit and collection departments

Expert Solution

Factoring is a process where in account receivables of a company are sold to a factor or a financial agency. The factoring agency undertakes the responsibility to collect the account receivables for a factoring fee.

It helps the company to receive advance payments. Conversion of account receivable into cash is very quick. Factoring helps to solve working capital problem of the company. Factoring is used for clients with good credit rating

(A) and (B) are the advantages of factoring.

However, it is an expensive service, this is a disadvantage. i.e. Option (C)

Elimination of credit and collection department is not related to factoring, since factoring is used for Account receivable which are not due. However, collection and credit facility is used in case of dues which are very old and there is very little scope of recovery from such clients.

jeff jeffy answered 2 years ago

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