Which statement correctly describes non-recourse factoring?

Which statement correctly describes non-recourse factoring?

• A. The seller bears the losses
• B. The buyer bears the losses
• C. The factor bears the losses
• D. Losses are absorbed by the factor, not the seller

Answer: (D)

Non-recourse factoring transfers the risk of non-payment from the seller to the factor. In this setup, the seller sells its accounts receivable and gets cash upfront, while the factor takes on the responsibility if a customer doesn't pay. The key idea is that the loss from unpaid invoices is absorbed by the factor, not the seller. There are usual caveats—if the unpaid debt results from fraud or a disputed invoice, exceptions can apply—but the general principle is that the factor bears the credit risk. So the statement that aligns with this is that losses are absorbed by the factor, not the seller.

Non-recourse factoring transfers the risk of non-payment from the seller to the factor. In this setup, the seller sells its accounts receivable and gets cash upfront, while the factor takes on the responsibility if a customer doesn't pay. The key idea is that the loss from unpaid invoices is absorbed by the factor, not the seller. There are usual caveats—if the unpaid debt results from fraud or a disputed invoice, exceptions can apply—but the general principle is that the factor bears the credit risk. So the statement that aligns with this is that losses are absorbed by the factor, not the seller.