Association for Financial Professionals (AFP) Practice Exam

In a factoring arrangement, what is typically true about customer notifications?

1. Customers are always unaware of the sale

2. Notification is optional for the seller

3. Most factoring is done on a notification basis

4. Customers must give consent to the factor

The correct answer is: Most factoring is done on a notification basis

In a factoring arrangement, it is generally true that most factoring is conducted on a notification basis. This means that once a business sells its receivables to a factor, the factor typically informs the customers that their invoices have been assigned to the factor for collection. This notification is crucial as it allows the factor to collect payment directly from the customers and ensures that the customers know where to direct their payments. This method benefits both the seller and the factor. For the seller, it facilitates a smoother transition of receivables management and provides assurance that their customers are aware of the new payment arrangement. For the factor, it is essential for effective cash collection, as it legitimizes their role in the transaction and reduces the risk of confusion regarding payment obligations. In contrast, the other options imply scenarios that are typically less common or not true in general factoring practices. While some forms of factoring may allow sellers to keep customers unaware of the sale or make notification optional, these arrangements are not the standard practice in most factoring situations.