Question: MDM Inc is considering factoring its receivables The firm has

MDM Inc. is considering factoring its receivables. The firm has credit sales of $ 400,000 per month and has an average receivables balance of $ 800,000 with 60- day credit terms. The factor has offered to extend credit equal to 90 percent of the receivables factored less interest on the loan at the rate of 1.5 percent per month. The 10 percent difference in the advance and the face value of all receivables factored consists of a 1 percent factoring fee plus a 9 percent reserve, which the factor maintains. In addition, if MDM Inc. decides to factor its receivables, it will sell them all so that it can reduce its credit department costs by $ 1,500 a month.
a. What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement?
b. What considerations other than cost should be accounted for by MDM Inc. in determining whether to enter the factoring agreement?

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  • CreatedSeptember 11, 2015
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