Question

Read the passage given below and answer the questions that follow.

ABC Ltd. is a hardware manufacturing company listed on National Stock Exchange. The company operates only in Delhi-NCR. The management plans to expand their area of operation across the country. They require funds for their expansion plans.

1. Briefly explain the factoring source of finance.
2. State whether the factoring source can be used by ABC Ltd. or not for raising funds. Give a reason to support your answer.

Answer 1

1. Factoring is a financial service where a business sells its accounts receivable (invoices) to a third party (called a factor) at a discount. The factor immediately provides cash to the business, improving its liquidity. The factor then collects the outstanding amounts from the company's customers. Factoring helps businesses manage cash flows and reduce credit risk.
2. Yes, ABC Ltd. can use factoring as a source of finance. Because ABC Ltd. is a hardware manufacturing company, which implies it likely sells goods on credit to buyers. This means it will have accounts receivable. Since factoring is based on the sale of such receivables, ABC Ltd. can use it to raise short-term funds to support its expansion plans across the country.