Question

Tunebeak, a fast food service chain, wants to introduce a new product. However, it lacks the financial support required to promote its product. Therefore, it sells its accounts receivables from its customers to a financing firm and is able to invest in the promotion of its product. Which of the following short-term financing options is being used by Tunebeak in the given scenario?A. Commercial paper
B. Factoring
C. Short-term bank loans
D. Trade credit

Answer 1

Answer:

B. Factoring

Explanation:

Factoring is a financial transaction in which a business sells its accounts receivables to a third party (mostly financing firms) at a discount. Accounts receivable is a record of money customers owe to the company for sales made on credit.

The company sells its future cash-flow owed by it's customers, in return for cash upfront but the cash received is less than the amount it would've received in accounts receivable later because the financing company charges  that amount of providing cash (liquidity) to the company.

Factoring is not considered a loan, as the parties neither issue nor acquire debt as part of the transaction.

So the short-term financing option utilized by Tunebeak is Factoring.

Answer 2

Answer:

The short-term financing options is being used by Tunebeak is option B) Factoring

Explanation:

Factoring is a financial transaction and a type of debtor finance in which a business sells its accounts receivable (i.e., invoices) to a third party (called a factor) at a discount. A business will sometimes factor its receivable assets to meet its present and immediate cash needs.

Factoring is also seen as a form of invoice discounting in many markets and is very similar but just within a different context. In this purchase, accounts receivable are discounted in order to allow the buyer to make a profit upon the settlement of the debt. Essentially factoring transfers the ownership of accounts to another party that then chases up the debt.

Factoring therefore relieves the first party of a debt for less than the total amount providing them with working capital to continue trading, while the buyer, or factor, chases up the debt for the full amount and profits when it is paid. The factor is required to pay additional fees, typically a small percentage, once the debt has been settled. The factor may also offer a discount to the indebted party.