ACCA Financial Management (F9) Certification Practice Exam

Invoice factoring is characterized by which of the following statements?

1. The discounter takes over sales ledger administration

2. It is used for long-term financing

3. It enables immediate cash flow for the seller

4. It typically involves multi-year contracts

The correct answer is: It enables immediate cash flow for the seller

Invoice factoring is characterized by its ability to provide immediate cash flow to the seller, which is the essence of this financing method. When a business engages in factoring, it sells its accounts receivable (invoices) to a third party, known as a factor. By doing so, the seller receives a significant portion of the invoice amount as an immediate cash injection, which can help address liquidity issues and support ongoing operations without waiting for customers to pay their invoices. This immediacy is a crucial feature of invoice factoring, enabling businesses to convert their outstanding receivables into cash quickly, often within a day or two. This access to quick funds can be particularly advantageous for companies that may have cash flow constraints, allowing them to pay salaries, invest in inventory, or cover other operating expenses without delay. In contrast, other options do not accurately capture the nature of invoice factoring. The notion that it is used for long-term financing does not align with the granted immediacy of cash flow, as factoring is typically a short-term financing arrangement. While it may involve some level of administration by the factor, such as managing the sales ledger, that is not the primary characteristic. Lastly, multi-year contracts are not typical in factoring agreements, which usually have a more