The Bone Company has been factoring its accounts receivable for the past 5 years. The factor charges a fee of 2 percent and will lend up to 80 percent of the volume of receivables purchased for an additional 1.5 percent per month. The firm typically has sales of $500,000 per month, 70 percent of which are on credit. By using the factor, two savings would be effected:
a. $2,000 per month that would be required to support a credit department
b. A bad-debt expense of 1 percent on credit sales
The firm's bank has recently offered to lend the firm up to 80 percent of the face value of the receivables shown on the schedule of accounts. The bank would charge 15 percent per annum interest plus a 2 percent monthly processing charge per dollar of receivables lending. The firm extends terms of "net 30," and all customers who pay their bills do so by the 30th day. Should the firm discontinue its factoring arrangement in favor of the bank's offer if the firm borrows, on the average, $100,000 per month on its receivables?