AAT L4 Credit Management 4

Question 1

The 'five Cs of credit' framework for assessing creditworthiness includes character, capacity, capital, conditions, and:

Accepted Answer

Collateral

Answer

The five Cs of credit are: Character (integrity and willingness to pay), Capacity (ability to repay from cash flows), Capital (financial strength), Conditions (economic/industry environment), and Collateral (security offered).

Question 2

A debenture is a form of security given by a company to a lender that:

Accepted Answer

Creates a fixed or floating charge over the company's assets as security for the debt

Answer

A debenture is a document evidencing a company's indebtedness to a lender, typically secured by a fixed charge (specific assets) and/or floating charge (all assets) — providing the lender with security if the company defaults.

Question 3

When a customer becomes insolvent and enters administration, the credit manager should:

Accepted Answer

Stop all further credit supply and register the debt with the administrator as an unsecured creditor as soon as possible

Answer

On insolvency, the business should: stop further credit supply immediately, enforce any retention of title rights, and submit a proof of debt with supporting documentation to the administrator promptly to maximise recovery prospects.

Question 4

Under the Insolvency Act 1986, which of the following categories of creditor is paid FIRST in a liquidation?

Accepted Answer

Secured creditors with a fixed charge

Answer

The order of priority in liquidation: (1) fixed charge holders, (2) liquidator's expenses, (3) preferential creditors (employees' wages, pension contributions), (4) floating charge holders, (5) unsecured creditors, (6) shareholders. Fixed charge holders rank first.

Question 5

Debt factoring provides immediate liquidity because:

Accepted Answer

The factor advances a percentage (typically 70–90%) of the face value of invoices immediately, before customers have paid

Answer

Invoice factoring: the factor advances typically 70–90% of invoice value on the day the invoice is raised. When the customer pays (or after the recourse period), the factor remits the balance less their fees.

AAT Level 4 Practice Test

AAT Level 4 Practice Test

AAT L4 Credit Management 4