What role do factors play concerning accounts receivable?

What role do factors play concerning accounts receivable?

• A. They help renegotiate payment terms with clients
• B. They purchase accounts receivable to enhance cash flow
• C. They assist in collecting overdue accounts
• D. They create new credit policies for clients

Answer: (B)

Factors, or factoring companies, play a significant role in enhancing cash flow through the purchase of accounts receivable. When a business sells its accounts receivable to a factor, it receives immediate cash rather than waiting for customers to pay their invoices. This transaction helps the business improve its liquidity and manage its operating expenses more effectively, as it can utilize the funds right away for other business needs instead of being tied up in outstanding invoices. While the other options touch on aspects of accounts receivable management, they do not specifically capture the primary function that factors serve. Renegotiating payment terms, collecting overdue accounts, or creating new credit policies are functions typically associated with internal credit management or collections teams within a business rather than the specific service that factors provide in purchasing receivables. The essence of factoring is to improve cash flow by enabling businesses to convert receivables into cash quickly.

Factors, or factoring companies, play a significant role in enhancing cash flow through the purchase of accounts receivable. When a business sells its accounts receivable to a factor, it receives immediate cash rather than waiting for customers to pay their invoices. This transaction helps the business improve its liquidity and manage its operating expenses more effectively, as it can utilize the funds right away for other business needs instead of being tied up in outstanding invoices.

While the other options touch on aspects of accounts receivable management, they do not specifically capture the primary function that factors serve. Renegotiating payment terms, collecting overdue accounts, or creating new credit policies are functions typically associated with internal credit management or collections teams within a business rather than the specific service that factors provide in purchasing receivables. The essence of factoring is to improve cash flow by enabling businesses to convert receivables into cash quickly.