Question: A furniture company is considering using a factor to manage
A furniture company is considering using a factor to manage its trade receivables. The company has $1,600,000 in trade receivables with a 70-day average collection period. The factor charges a 10% reserve for returns and allowances, a 2% factoring commission, and an annual interest rate of 4% over prime (assume prime is 5%). If the company manages its own receivables, it would cost $3,000 a month for administrative fees and clerical costs in addition to $4,000 a month in bad debt losses. Based on this information, what would the company’s APR be?
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