In order to faster convert Account Receivable into cash, a company can sell its accounts receivable to another company, called a factor, at a discount.

Assume your average credit sales are $50 million per year and average accounts receivable are $5 million. A factoring company offers you an agreement that it will be buying your accounts receivable at a 2.40% discount. Your bank offers you a credit at R% per year (actual yearly rate).

What would be the minimum R% for which you would choose factoring? That is, what is the rate R% offered by the bank at or below which you would rather borrow money from the bank instead of factoring?

Answer rating: 100% (QA)

Heres how to calculate the minimum bank interest rate R that would make borrowing from the bank preferable to factoring 1 Factoring Cost We need to ca... View the full answer