Aardvark needs some quickly obtainable funds to pay some overdue bills

QUESTION

Aardvark needs some quickly obtainable funds to pay some overdue bills. It is considering using factoring–obtaining cash in exchange for outstanding accounts receivable funds.

Which of the following, if true, strengthens the case for using factoring?
A) Factoring can be a costly way to obtain ready cash.
B) Aardvark would not have to liquidate any of its core assets to stay in business.
C) Customers may be annoyed if they think their account has been turned over to a collection agency.
D) Additional accounting practices are necessary to keep track of factored customer accounts.
E) Factoring companies usually won’t take on receivables more than 90 days old.

ANSWER

Answer: B
Explanation: B) Factoring can help a company obtain cash for pressing needs without having to take more drastic steps, such as liquidating core assets. Factoring has several disadvantages, however, for the company selling its receivables, including the costs, either in fixed fees or as a percentage of the receivables (Choice A); the possibility that customers may not realize the difference between a factoring agency and a collection agency (Choice C); the additional bookkeeping necessary to keep track of accounts (Choice D); and the fact that factoring companies are not going to help collect on older receivables (Choice E).