Your business does about $1.5 million in business, with sales equally spread thr

Question

Your business does about $1.5 million in business, with sales equally spread throughout the year. Your average invoice size is about $26,000. You give all of your customers credit terms of Net 30 days, but most of your customers pay on 45 days.

You need working capital to take on new orders, so you approach Slick Willy Factoring to get some cash. Slick Willy says that he will advance you 97% of the face value of any invoice. The customers will have to pay Slick Willy back the full amount of the invoice and he says he will charge you an additional 0.5% for each week that a customer is late in paying. Further, he will charge you $2,000 per month "standby" fee for his services plus a transaction fee of $150 for each invoice.

Assuming you factor all of your receivables in the coming year, how much in total dollars will your financing arrangement with Slick Willy cost? How much will that be in terms of the interest rate you are paying on the funds you actually receive?

Explanation / Answer

Sales that would be outstanding for 45 days       = 1,500,000*45/365 = $ 184931

Amount that would be paid by the Factor           = 184931 *0.97       = $ 179,384

Costs of factoring:

Stand by fee                                   = 12*2000 = 24,000

Transaction fee                     =   58*150 = 8,700

Late fee 0.5*2% on 1,500,000                           = 15,000             47,700

Rate                                                                                      = 47700/179384 = 0.2659 = 26.59%

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