Question

1. For example, if $100,000 in receivables is factored, carrying 60-day credit terms, a 4 percent factor’s fee, a 6 percent reserve, and interest at 1 percent per month on advances, then the maximum loan or advance the firm can receive is computed as follows:

Answer 1

Factor Fee rate = 4% ; Factor fee = $100,000*4% = $4,000

Reserve = 6% ; Reserve amount = $100,000*6% = $6,000

Amount available to make advance = Factored receivables less fector fee & reserve

Amount available to make advance (includes loan & interest) = $100,000-$4,000-$6,000 = $90,000

Assumed one month = 30 days ; therfore 60 days credit terms = 2 months

Interest to be charged = ($90,000*1%*2months)/102%

= $180,000/102 = $1,764.71

Advance the firm receive = $90,000 - $1,764.71 = $88,235.29