Cost of borrowing the maximum amount of credit

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Reference no: EM131068404

Bonneau Sunglass Co. is considering the factoring of its receivables. The firm has credit sales of $500,000 per month and has an average receivables balance of $1,000,000 with 60-day credit terms. The factor has offered to extend credit equal to 85% of the receivables factored less interest on the loan at a rate of 2% per month. The 15% difference in the advance and face value of all receivables factored consists of a 2% factoring fee plus a 13% reserve, which the factor maintains. In addition, if Bonneau decides to factor its receivables, it will sell them all, so that it can reduce its credit costs by $2,000 a month. a. What is the cost of borrowing the maximum amount of credit available to Bonneau through the factoring agreement? b. What considerations other than cost should be accounted for by Bonneau in determining whether or not to enter the factoring agreement?

Reference no: EM131068404

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