- 14 Marks
FM – Nov 2020 – L2 – Q5a – Management of receivables and payables
Compare the costs of factoring vs. bank financing for receivables management and advise on the best option.
Question
Pee Ltd has been factoring its debtors for the past 5 years. The factor charges a fee of 2% and will lend up to 80% of the volume of debtors purchases for an additional ¾% per month. The firm typically has sales of GH¢500,000 per month, 70% of which are on credit. By using the factor, two savings are effected:
- GH¢2,000 per month that would be required to support a credit department, and
- A bad-debt expense of 1% on credit sales.
Pee Ltd’s bank has recently offered to lend it up to 80% of the face value of the debtors shown on the schedule of accounts. The bank would charge 8% per annum interest plus a 2% processing charge per GH¢1 of debtors lending. The firm extends terms of net 30, and all customers who pay their bills do so by the thirtieth of the month.
Required:
If the firm borrows on the average GH¢100,000 per month on its debtors, advise whether the firm should discontinue its factoring arrangement in favor of the bank’s offer.
Find Related Questions by Tags, levels, etc.
- Tags: Bank financing, Cost comparison, Factoring, Receivables Management
- Level: Level 2
- Topic: Management of receivables and payables
- Series: NOV 2020