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A business uses factoring to pay creditors - HSC - SSCE Business Studies - Question 3 - 2009 - Paper 1
Question 3
A business uses factoring to pay creditors. Which financial objective is the business trying to achieve? (A) Efficiency (B) Liquidity (C) Profitability (D) Solvency
Worked Solution & Example Answer:A business uses factoring to pay creditors - HSC - SSCE Business Studies - Question 3 - 2009 - Paper 1
Step 1
Identify the financial objective of using factoring.
Answer
Factoring is a financial transaction whereby a business sells its accounts receivable to a third party (the factor) at a discount. The main objective of using factoring is to convert receivables into cash quickly, improving the cash flow of the business. This process primarily addresses liquidity, allowing the business to meet immediate financial obligations and pay creditors more timely.
Step 2