The correct answer is: C. Factor provides cost free finance to seller.
Factoring is a type of financial arrangement in which a company sells its accounts receivable to a third party, known as a factor, at a discount. The factor then collects the receivables from the customers and pays the company the net amount, less the discount and any fees.
Factoring can provide a number of benefits to companies, including:
- Improved cash flow: By selling its receivables, a company can receive cash immediately, rather than having to wait for its customers to pay. This can be helpful for companies that need to meet short-term financial obligations.
- Reduced risk: When a company sells its receivables, it transfers the risk of non-payment to the factor. This can be a significant benefit for companies that sell to customers with poor credit histories.
- Increased borrowing capacity: Factoring can improve a company’s creditworthiness, which can make it easier for the company to borrow money.
However, there are also some potential drawbacks to factoring, including:
- Loss of control: When a company sells its receivables, it loses control over the collection process. This can be a problem if the factor is not as effective at collecting receivables as the company itself.
- Cost: There are typically fees associated with factoring, which can reduce the amount of cash that the company receives.
- Loss of flexibility: Once a company has sold its receivables, it cannot collect them directly from its customers. This can be a problem if the company needs to collect payments quickly or if it wants to offer its customers discounts for early payment.
Overall, factoring can be a useful tool for companies that need to improve their cash flow or reduce their risk. However, it is important to carefully consider the potential drawbacks before entering into a factoring arrangement.
In the question, option A is true because factoring is a continuous arrangement between the factor and the seller. Option B is true because the seller sells its receivables to the factor. Option D is true because factoring can provide a number of benefits to companies, including improved cash flow, reduced risk, and increased borrowing capacity. Option C is false because the factor typically charges fees for its services, which means that the seller does not receive cost-free finance.