Analyse the advantages for a business of debt factoring.

Mark scheme

Marking points from the official mark scheme (Oct/Nov 2021). The mark or mark type is shown in brackets.

1. Important note: some candidates may interpret the question as being the advantages for a debt factoring business of providing the debt factoring service. This is a valid interpretation and this mark scheme should be applied to such answers.
2. Clear understanding of debt factoring
3. Reference to a relevant business context, e.g. a business using debt factoring
4. The selling of invoices to a third party at a discounted price in order to bypass often long waiting times for payment, although it reduces overall profit for businesses – usually between 1%-3% of the invoice value is charged
5. Especially popular with small businesses in that it provides instant access to working capital, but less control over sales and less relationship with customers
6. Greatest advantage is that it can improve cash flow – discounted cash value of invoices instantly released
7. Can use this cash to operate the business and re-invest in the business
8. Good cash flow is vital as it is the key to day-to-day operations and growth – can take on more work and complete more jobs, gain more revenue
9. Saves time in managing and chasing up invoices, frees up management time and this contributes to overall efficiency
10. Debt factoring can lead to accelerated growth and eventual building up of funds that means debt factoring is no longer required
11. Accept any other valid response.
12. Clear understanding of venture capitalists
13. Reference to the business context of venture capital investment
14. Venture capitalists provide risk capital for business start-ups or expansion for established businesses that find it difficult to gain finance from other sources
15. The critical factors for investment in an existing computer games retailer or any business include the following:
16. The character, reliability, honesty of the business owner
17. The capacity of the business owner to develop the business and take it to a new level
18. The extent to which a standout/unique/innovative way of marketing/selling is proposed
19. What benefits that might result for the local community
20. The long-term sustainability of the business
21. The financial outlook for the business
22. How attractive the market opportunity is
23. A candidate may make a judgement/conclusion as to the most important factors for a venture capitalist to consider when deciding whether to provide growth capital for a computer games retailer.
24. An attempt to make a judgement/draw a conclusion about the most important factors
25. Evaluative comments that weigh up evidence/argument in relation to the most important factors:
26. Venture capitalists want to minimise risk over the above factors – and the highest risk tends to be the quality of the management of a computer games retailer
27. Application of these factors and risks to a computer games retailer – degree of competition – imbalance between technological and design expertise and the ability to operate and manage a business
28. Accept any other valid response.