'CloudSync', a rapidly growing SaaS (Software as a Service) startup, is experiencing cash flow difficulties due to late-paying enterprise clients. The finance director is considering either factoring or invoice discounting.

Which of the following statements correctly distinguishes factoring from invoice discounting?

Answer options:

Factoring is always with recourse, meaning CloudSync retains the bad debt risk, while invoice discounting is always non-recourse.

Factoring usually involves the factor taking over the administration of the sales ledger, whereas invoice discounting does not.

Invoice discounting is highly visible to customers, whereas factoring is strictly confidential.

Factoring provides an immediate cash advance against invoices, whereas invoice discounting only pays when the customer settles the invoice.

How to approach this question

Compare the administrative services provided by a factor versus an invoice discounter.

Full Answer

B.Factoring usually involves the factor taking over the administration of the sales ledger, whereas invoice discounting does not.✓ Correct

Factoring involves the factor taking over the administration of the client's sales ledger and collecting debts on their behalf. Invoice discounting is purely a source of finance against the security of the receivables ledger, and the client retains control of the sales ledger administration. Furthermore, invoice discounting is usually confidential, whereas factoring is not.

Common mistakes

Reversing the confidentiality aspect (thinking factoring is confidential).

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Practice the full ACCA FM — Financial Management Practice Exam 3

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