ACCA Financial Management (F9) Certification Practice Exam

What is the primary benefit of using factoring for a business?

1. Advanced payment for debts

2. Reduction of long-term debts

3. Improved market share

4. Increased equity financing

The correct answer is: Advanced payment for debts

The primary benefit of using factoring for a business is the advancement of cash for debts that are owed to the business. Factoring involves selling accounts receivable to a third party, typically a financial institution or a factoring company, at a discount. This enables the business to receive immediate cash rather than waiting for customers to pay their invoices. By obtaining upfront cash flow, a company can use the funds for various operational needs, such as paying suppliers, managing payroll, or investing in growth opportunities. This can be particularly beneficial for businesses that face cash flow challenges or have seasonal fluctuations in sales. While other options may seem advantageous, they do not accurately represent the core advantage of factoring. For instance, factoring does not directly reduce long-term debts or enhance market share, and it does not pertain to equity financing. Instead, it serves as a tool for optimizing cash flow through the conversion of receivables into immediate working capital.