Question：Which of the following statements best describes the invoice discounting service offered by a factoring company?
A. The factoring company enforces the correct administration of the client's system of offering cash discounts, and ensures that discounts are disallowed in line with policy.
B. The factoring company advances finance to the client against the debts which the factor has purchased, up to 80% of the value of the debts.
C. The factoring company purchases a selection of invoices, at a discount, thus providing the client with a source of short-term finance.
D. The factoring company takes over the administration of the client's invoicing system.
The correct answer is: The factoring company purchases a selection of invoices, at a discount, thus providing the client with a source of short-term finance.
True invoice discounting is a one-off arrangement made purely for the advance of cash to the client to cover a short-term cash shortfall.
While a factoring company may take over invoicing, this is an administrative service and has no financial component. It therefore has nothing to do with invoice discounting.
Enforcing correct administration is an administrative function that will be carried out by the factoring company if it is responsible for debt collection. It has nothing to do with the allowance of finance.
Advancing finance to the client is effectively 'factor finance', or the allowance of short-term finance against the total receivables ledger rather than against individual invoices.
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