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Social Science Clinic => Business => Finance => Topic started by: sheilaspns on May 1, 2019

Title: Bonneau Sunglass Co. is considering the factoring of its receivables. The firm has credit sales of ...
Post by: sheilaspns on May 1, 2019

Bonneau Sunglass Co. is considering the factoring of its receivables. The firm has credit sales of $500,000 per month and has an average receivables balance of $1,000,000 with 60-day credit terms. The factor has offered to extend credit equal to 85% of the receivables factored less interest on the loan at a rate of 2% per month. The 15% difference in the advance and face value of all receivables factored consists of a 2% factoring fee plus a 13% reserve, which the factor maintains. In addition, if Bonneau decides to factor its receivables, it will sell them all, so that it can reduce its credit costs by $2,000 a month.

a.	What is the cost of borrowing the maximum amount of credit available to Bonneau through the

factoring agreement?

b.	What considerations other than cost should be accounted for by Bonneau in determining

whether or not to enter the factoring agreement?

Title: Bonneau Sunglass Co. is considering the factoring of its receivables. The firm has credit sales of ...
Post by: onowka on May 1, 2019

a.	Maximum advance

Face value of receivables

(2 months credit sales)

$1,000,000

Less: factoring fee (2%)

(20,000)

Reserve (13%)

Interest (2% per month for 60 days)

*(34,000)

Loan advance (less discount interest)

$816,000

*Interest is calculated on the 85 percent of the factored accounts that can be borrowed,
(.85 × $1,000,000 × .02 × 2 months) = $34,000 or ($1,000,000 - $20,000 - $130,000) × .02 × 2
months) = $34,000. Thus, the effective cost of credit to Bonneau's is calculated as follows:
RATE =    ×   = .3676 or 36.76%
**Credit department savings for 60 days equals 2 × $2,000.
Calculated on an annual basis, the cost of credit would be:

RATE =  ×   = .3676 or 36.76%
where interest = .02 × $850,000 × 12 = $204,000
factoring fee = .02 × $500,000 × 12 = $120,000
credit department savings= 12 × $2,000 = $24,000

b.	Of particular concern here is the presence of any "stigma" associated with factoring. In some

industries, factoring simply is not used unless the firm's financial condition is critical. This would appear to be the case here, given the relatively high effective rate of interest on borrowing.