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Solution:: The Following Are The Data Given in The Question For Factoring

The document provides data on factoring fees, loan to value ratio, interest rates, sales, and credit sales for a company. It also provides data on a bank's processing fees and interest rate offer. To compare the factoring and bank offer, the summary calculates costs for borrowing $100,000 at each rate. The effective cost of borrowing from the bank at 3.29% is less than the effective cost of factoring at 3.63%. Therefore, the summary recommends the company borrow from the bank.

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Cma Saurabh Arora
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93 views1 page

Solution:: The Following Are The Data Given in The Question For Factoring

The document provides data on factoring fees, loan to value ratio, interest rates, sales, and credit sales for a company. It also provides data on a bank's processing fees and interest rate offer. To compare the factoring and bank offer, the summary calculates costs for borrowing $100,000 at each rate. The effective cost of borrowing from the bank at 3.29% is less than the effective cost of factoring at 3.63%. Therefore, the summary recommends the company borrow from the bank.

Uploaded by

Cma Saurabh Arora
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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THE FOLLOWING ARE THE DATA GIVEN IN THE QUESTION FOR FACTORING

FACTORING FEES 2.00%


LOAN TO VALUE RATIO 80%
INTEREST RATE 1.50% PER MONTH
TOTAL SALES 5,00,000
CREDIT SALES TO TOTAL SALES 70%
CREDIT SALES 3,50,000
BAD DEBT RISK 1% ON CREDIT SALES

THE FOLLOWING ARE THE DATA GIVEN IN THE QUESTION FOR BANK'S OFFER
BANK'S PROCESSING FEES 2%
INTEREST RATE 15% PER ANNUM
PAYMENT TERMS NET 30

Solution:
As per the question, we will consider the credit sales of $ 125,000 so that the borrowing amount
comes to $ 100,000 as per loan to value ratio in order to make the factoring comparable to bank's
offer.
EVALUATION OF FACTORING MONTHLY
CREDIT SALES 1,25,000
ELIGIBLE AMOUNT TO BE LENT 1,00,000
FACTORING FEES@2% ON $ 100,000 2,000
INTEREST COST@1.5% ON $ 100,000 1,500
NET AMOUNT LENT 96,500

TOTAL COST OF FACTORING


FACTORING FEES 2,000
INTEREST COST 1,500
TOTAL 3,500
NET AMOUNT LENT 96,500
EFFECTIVE COST OF FACTORING 3.63%

EVALUATION OF BANK'S OFFER MONTHLY


CREDIT SALES 1,25,000
ELIGIBLE AMOUNT FOR LENDING 1,00,000
BANK'S PROCESSING CHARGE@2% 2,000
NET AMOUNT LENT 98,000

TOTAL COST OF BORROWING FROM BANK


BANK'S PROCESSING CHARGE@2% 2,000
INTEREST COST@1.25% P.M (15%/12) ON $98,000 1,225
TOTAL 3,225
NET AMOUNT LENT 98,000
EFFECTIVE COST OF BORROWING 3.29%

EFFECTIVE COST OF BORROWING IS LESS THAN EFFECTIVE COST OF FACTORING. THEREFORE, THE FIRM SHOULD
GO FOR BORROWING FROM THE BANK.
NOTE: ADMINISTRATION COST TO SUPPORT CREDIT DEPARTMENT AND BAD DEBT RISK HAS BEEN CONSIDERED
COMMON AND IRRELEVANT COST FOR THE PURPOSE OF DECISION MAKING.

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