Illustration No 1: Computation of the Maximum loan or advances
Question:
Company XYZ has factored $500,000 of its accounts receivable with a 60 day credit term. The factor charges a 1.75% fee, a 7.5% reserve and interest at 2% per month on advances. What is the maximum loan or
advance that the firm can receive from the factor?
Suggested solution:
Face value of accounts receivable $500,000
Less: Fee(0.0175 x $500,000) (8,750)
Reserves( 0.075 x $500,000) (37,500)
Interest(0.02 x $453,750 x 2 months) (18,150)
MAXIMUM loan or advance $435,600
Effective cost of credit = ($18,150 +$8,750) /$435,600 x 360/60
=0.3705
=37.05%
