Which type of company purchases accounts receivable at a discount and the seller bears the risk of default?

Which type of company purchases accounts receivable at a discount and the seller bears the risk of default?

• A. Commercial finance company
• B. Factoring company
• C. Investment company
• D. Venture capital firm

Answer: (A)

A commercial finance company is typically involved in the business of providing loans and financing, often secured by collateral, such as accounts receivable. However, in the context of purchasing accounts receivable at a discount while the seller retains the risk of default, the correct choice is, in fact, a factoring company. A factoring company specializes in buying accounts receivable from businesses, providing immediate cash flow. The seller of the accounts receivable sells them to the factoring company at a discount. This practice allows businesses to obtain liquidity quickly without waiting for their customers to pay their invoices. One key component of this arrangement is that the seller generally retains the risk of default, meaning that if the customer fails to pay the invoice, the factoring company does not assume that risk. Understanding this structure is essential as it illustrates the mechanisms of cash flow management in business and the role of different types of financial institutions in facilitating various financial arrangements.

A commercial finance company is typically involved in the business of providing loans and financing, often secured by collateral, such as accounts receivable. However, in the context of purchasing accounts receivable at a discount while the seller retains the risk of default, the correct choice is, in fact, a factoring company.

A factoring company specializes in buying accounts receivable from businesses, providing immediate cash flow. The seller of the accounts receivable sells them to the factoring company at a discount. This practice allows businesses to obtain liquidity quickly without waiting for their customers to pay their invoices. One key component of this arrangement is that the seller generally retains the risk of default, meaning that if the customer fails to pay the invoice, the factoring company does not assume that risk.

Understanding this structure is essential as it illustrates the mechanisms of cash flow management in business and the role of different types of financial institutions in facilitating various financial arrangements.