Module: | MODULE A: INTERNATIONAL BANKING
Q134: Consider the following statements regarding a scenario where an exporter utilizes non-recourse export factoring to manage a 500,000 United States Dollars receivable:
1. By opting for non-recourse factoring, the exporter transfers the entire commercial risk of the overseas buyer defaulting directly to the factoring institution.
2. The factoring institution will typically advance 100 percent of the invoice value to the exporter on the exact day the physical goods are loaded onto the ship.
3. The factoring institution manages the sales ledger, undertakes the collection of dues directly from the foreign buyer, and provides comprehensive protection against bad debts.
Which of the above statements is or are INCORRECT?
2. The factoring institution will typically advance 100 percent of the invoice value to the exporter on the exact day the physical goods are loaded onto the ship.
3. The factoring institution manages the sales ledger, undertakes the collection of dues directly from the foreign buyer, and provides comprehensive protection against bad debts.
Which of the above statements is or are INCORRECT?
✅ Correct Answer: B
🎯 Quick Answer:
Statement 2 is the only incorrect statement.In a non-recourse arrangement, the factor completely absorbs the risk of the buyer failing to pay.
Structural Breakdown: Factoring provides three distinct services: upfront financing, professional ledger management, and credit protection.
The exporter receives immediate working capital, does not have to chase the foreign buyer for payment, and is protected if the buyer goes bankrupt.
Historical Context: Factoring evolved to support open account trade, where goods are shipped and delivered long before payment is due.
This is highly risky for the exporter but heavily preferred by international buyers who dictate trade terms.
Causal Reasoning: Statement 2 is incorrect because a factoring institution practically never advances 100 percent of the invoice value upfront.
To protect itself against minor trade disputes, short shipments, or quality deductions, the factor typically advances 80 to 90 percent of the value.
The remaining balance, minus the commission and interest charges of the factor, is paid only after the overseas buyer completely settles the invoice.