Business scenario: Your business does about $1.5 million in business, with sales
ID: 2571494 • Letter: B
Question
Business scenario:
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?
Hint: Interest calculations should be based on the money you actuallyreceive.
Explanation / Answer
Sales that would be outstanding for 45 days = 1,500,000*45/365 = $184,931.00
Sales that would be outstanding for 45 days = 1,500,000*45/365 = $184,931.00
Amount that would be paid by the Factor = $184,931.00 *0.97 = $ 179,384 Costs of factoring: Stand by fee = 12*2,000 = 24,000 Transaction fee = 58*150 = 8,700 Late fee 0.5*2% on 1,500,000 = 15,000 Total = 47,700 Rate = $47,700/$179,384 = 0.2659 = 26.59%Related Questions
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