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Induss Inc. is considering obtaining funding through advances against receivables. Total annual credit sales are $600,000.00, terms are net 30 days, and payment is made on an average of 30 days. A local bank will advance funds under a pledging arrangement for 13 percent annual interest. On average, 75 percent of credit sales will be accepted as collateral. Ikhlas Finance offers factoring on a nonrecourse basis for a 1 percent factoring commission, charging 1.5 percent per month on advances and requiring a 15 percent factor's reserve. Under this plan, the firm would factor all accounts and close its credit and collections department, saving $10,000.00 per year.
(i) Calculate the effective interest rate and the average amount of funds available under pledging and under factoring.
(ii) What considerations other than cost should a firm account for in determining whether to enter the factoring agreement?
Finance is about Gunns Ltd, a company in dealing with forestry products in Australia. The company has also been listed in Australian Stock Exchange. As many companies producing forestry products, even Gunns Ltd is facing various problems. Due to the ..
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