1. What is the primary purpose of Factoring in financial services?
A. Providing long-term loans to exporters
B. Financing through issue of debentures
C. Converting receivables into immediate cash
D. Facilitating foreign exchange transactions
Factoring is a financial service where accounts receivables are sold to a factor to get immediate funds.
2. Which country is considered the birthplace of modern factoring services?
A. United States
B. India
C. United Kingdom
D. Germany
Modern factoring originated in the United States, although the concept existed in ancient trade practices.
3. In Domestic Factoring, the parties involved are:
A. Importer, Exporter, Bank
B. Exporter, Import Factor, Export Factor
C. Seller, Buyer, Import Factor
D. Seller, Buyer, Factor (all within same country)
Domestic factoring involves the seller, the buyer, and the factor, all operating in the same country.
4. International Factoring typically involves how many parties?
A. 2
B. 4
C. 3
D. 5
International factoring usually involves 4 parties: Exporter, Importer, Export Factor, and Import Factor.
5. A small manufacturing firm sells goods on credit to a domestic buyer but needs immediate cash. Which type of factoring is most suitable?
A. International Factoring
B. Forfaiting
C. Domestic Factoring
D. Bill of Exchange Discounting
Domestic factoring is ideal for local sellers who want to convert their receivables into immediate funds from buyers within the same country.
6. Which of the following best differentiates Bills Discounting from Factoring?
A. In bills discounting, accounts receivable are sold; in factoring, bills are discounted
B. Factoring is always with recourse, bills discounting is always without recourse
C. Both provide long-term finance
D. Bills discounting involves discounting of bills of exchange, while factoring involves sale of receivables with additional services
Bills discounting is limited to discounting bills of exchange, while factoring includes financing plus services like collection, sales ledger management, and credit protection.
7. Which of the following is a common component of fees charged in Factoring services?
A. GST and transaction tax only
B. Finance charges and service fee
C. Import duty and customs fee
D. Dividend distribution tax
Factoring fees generally include finance charges (interest on funds advanced) and a service fee (for administration, collection, and risk coverage).
8. Which of the following is NOT an advantage of Factoring?
A. Provides immediate liquidity
B. Outsources collection of receivables
C. Reduces seller’s need for maintaining credit control
D. Increases buyer’s working capital requirement
Factoring reduces financial pressure on sellers, not buyers. Immediate cash, credit protection, and outsourcing collections are its key benefits.
9. A company using factoring can reduce its need for:
A. Maintaining a credit and collection department
B. Issuing debentures for long-term funds
C. Maintaining high inventory levels
D. Paying advance tax
Factoring companies handle collection and credit management, allowing the seller to reduce or eliminate their internal credit control department.
10. In which situation would factoring be particularly beneficial for a business?
A. When the business has high retained earnings
B. When sales are mostly on cash basis
C. When the firm does not extend credit to customers
D. When receivables are high and liquidity is tight
Factoring is ideal for businesses with high receivables and liquidity issues, as it converts credit sales into immediate cash.
11. What is the primary purpose of Forfaiting in international trade?
A. To provide working capital loans to exporters
B. To finance export receivables by selling them to a forfaiter without recourse
C. To allow importers to hedge against currency fluctuations
D. To facilitate only domestic bill discounting
Forfaiting is a method where exporters sell their medium to long-term receivables to a forfaiter on a "without recourse" basis, ensuring immediate cash flow.
12. Which of the following best describes the mechanism of a forfaiting transaction?
A. The importer provides cash directly to exporter
B. Exporter sells goods on credit and receives payment only after maturity
C. Bank provides term loan to exporter
D. Exporter sells receivables (backed by bills of exchange/promissory notes guaranteed by importer’s bank) to forfaiter for immediate cash
In forfaiting, the exporter receives immediate cash by selling receivables (secured by importer’s bank guarantee) to a forfaiter, who collects payment at maturity.
13. In a forfaiting transaction, who bears the credit risk of the importer?
A. The forfaiter
B. The exporter
C. The importer
D. The export credit agency only
Since forfaiting is done without recourse, the forfaiter assumes the full credit risk of the importer once receivables are purchased.
14. Which of the following is a key component of fees involved in Forfaiting?
A. Processing fee and insurance fee only
B. Service tax and customs duty
C. Discount fee and commitment fee
D. Loan origination fee
Forfaiting charges typically include a discount fee (interest for credit period) and a commitment fee (for guaranteeing the facility in advance).
15. Forfaiting is generally more suitable for which type of export transactions?
A. Small retail exports with immediate cash payment
B. Domestic sales to MSMEs
C. Exports where credit period is less than 30 days
D. Capital goods exports with medium to long-term credit
Forfaiting is particularly suited for capital goods exports where buyers demand medium to long-term credit, often ranging from 1 to 5 years.
16. Which of the following is an advantage of Forfaiting for exporters?
A. Converts credit sales into immediate cash without recourse
B. Provides only short-term finance against domestic receivables
C. Requires exporters to maintain collection staff
D. Increases exporter’s credit risk
Forfaiting allows exporters to receive upfront payment for long-term receivables without bearing any credit or political risk.
17. Which of the following is NOT an advantage of Forfaiting?
A. Eliminates credit risk for exporters
B. Provides liquidity to exporters
C. Helps in better cash flow management
D. Reduces the cost of exports below normal bank financing
Forfaiting usually costs more than traditional bank financing; hence, while it eliminates risk and improves liquidity, it does not reduce the cost of exports.
18. Factoring is generally used for ______, while Forfaiting is used for ______.
A. Long-term export receivables; Short-term domestic receivables
B. Short-term receivables; Medium to long-term export receivables
C. Import transactions; Export transactions
D. Domestic trade; Personal loans
Factoring is used for short-term financing of receivables (both domestic and international), whereas forfaiting is primarily used for medium to long-term export receivables.
19. Which of the following statements is correct regarding the difference between Factoring and Forfaiting?
A. Factoring is always without recourse, Forfaiting is always with recourse
B. Factoring deals only with exports, Forfaiting deals with both domestic and exports
C. Factoring covers short-term receivables; Forfaiting covers medium to long-term receivables
D. Factoring is cheaper than all other financing; Forfaiting is free of cost
Factoring typically covers short-term receivables (30–180 days), while forfaiting covers medium to long-term receivables (1–5 years).
20. A small domestic manufacturer with 60-day credit sales would prefer ______, while a large exporter of capital goods with 3-year receivables would prefer ______.
A. Forfaiting; Factoring
B. Factoring; Forfaiting
C. Both Forfaiting
D. Both Factoring
Short-term domestic trade is better suited for Factoring, while long-term capital goods export transactions are suited for Forfaiting.
21. What is the main purpose of the Trade Receivables Discounting System (TReDS)?
A. To finance long-term infrastructure projects
B. To provide loans to large corporates
C. To facilitate financing/discounting of trade receivables of MSMEs
D. To regulate foreign exchange transactions
TReDS is an RBI-approved electronic platform for financing trade receivables of MSMEs through multiple financiers.
22. Which of the following are the main participants under TReDS?
A. MSME Sellers, Corporate Buyers, and Financiers
B. Only Banks and NBFCs
C. Importers, Exporters, and Customs Authorities
D. RBI, SEBI, and IRDAI
The three key participants in TReDS are MSME sellers (who raise invoices), corporate buyers (who accept them), and financiers (banks/NBFCs who bid to finance).
23. What is the correct process flow in TReDS?
A. Buyer uploads invoice → Seller accepts → Financier bids → Funds transferred to buyer
B. RBI uploads invoice → Bank accepts → Seller pays discount charges → Buyer gets funds
C. Seller requests loan → Bank sanctions loan → Buyer pays interest → RBI regulates
D. Seller uploads invoice → Buyer accepts → Financiers bid → Seller gets discounted funds; buyer pays financier at maturity
In TReDS, the seller uploads invoice, buyer accepts it, financiers bid to discount, and seller receives funds. At maturity, buyer pays the financier directly.
24. Which of the following is an eligibility criterion for entities to set up and operate a TReDS platform?
A. Must be an NBFC registered with SEBI
B. Must be a company incorporated under Companies Act and authorized by RBI
C. Must be an MSME association approved by SIDBI
D. Must be a foreign financial institution with RBI permission
As per RBI guidelines, only a company incorporated under the Companies Act and authorized by RBI under the Payment and Settlement Systems Act can operate a TReDS platform.
25. Which of the following is a key benefit of TReDS for MSMEs?
A. Ensures faster realization of receivables through competitive bidding by financiers
B. Guarantees subsidy from RBI for all invoices
C. Provides exemption from GST on all sales
D. Offers long-term project finance at concessional rates
TReDS helps MSMEs get quicker payments by auctioning their receivables to multiple financiers, ensuring transparency and better financing cost.
