What is effective interest rate and average amount of funds

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Reference no: EM13946797

To meet short term cash needs X inc is considering obtaining funding through advances against receivables. Total annual credit sales are 600,000, terms are net 30 days, and payment is made on the average of 30 days. Western National Bank will advance funds under pledging arrangement for 13 percent annual interest. On average, 75 percent of credit sales will be accepted as collateral. Finance Bank 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 per year. What is the effective interest rate and the average amount of funds available under pledging and under factoring? Which plan do you recommend and why?

Reference no: EM13946797

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