CAF-7 · Chapter 12 · Question 4 of 15
A company sells its outstanding trade receivables to a third-party financial institution. The agreement stipulates that if any of the customers default on their payments, the financial institution bears the loss and cannot demand the money back from the company. This arrangement is known as:
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) Non-recourse factoring
Explanation
In non-recourse factoring, the factor (the financial institution) assumes the risk of bad debts. If a customer defaults, the factor bears the loss, providing the selling company with complete protection against credit risk.
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