Okay… so why is 2% fee charged agains the total receivables and not the factored amount (i.e. 80% of the receivables) which was what was actually bought?
The Frame Supply Company has just acquired a large account and needs to increase its working capital by $100,000. The controller of the company has identified four alternative sources of funds, which are given as follows.
Pay a factor to buy the company's receivables, which average $125,000 per month and have an average collection period of 30 days. The factor will advance up to 80% of the face value of receivables at 10% and charge a fee of 2% on all receivables purchased. The controller estimates that the firm would save $24,000 in collection expense over the year. Assume that the fee and interest are not deductible in advance.
Annual Cost
Interest on average balance
($100,000 x .10 rate) $10,000
Fee payable to factor
(2% of purchased receivables) 30,000
(.02 x $125,000 x 12 mo.) ——-
$40,000
Less savings on collection expense (24,000)
——-
Net Cost $16,000
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Cost as a % = $16,000 / $100,000 = 16%
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and they ask me why I drink...
FAR- 61-next time I'll ask for lube instead of a calculator
REG-75- Never been so happy to see such a low grade
BEC- 8/11
AUD- 9/2
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