Ragha Co makes annual credit sales of $1,500,000. Credit terms are 30 days, but its debt administration has been poor and the average collection period has been 45 days with 1.5% of sales resulting in bad debts which are written off.

 

 

A factor would take on the task of debt administration and credit checking, at an annual fee of 2.5% of credit sales. Ragha would save $30,000 a year in administration costs. The payment period would be 30 days.

Factor will also reduce bad debt to 0.5% of the credit sales.

The factor would also provide an advance of 80% of invoiced debts at an interest rate of 14% (3% over the current base rate). Ragha can obtain an overdraft facility to finance its accounts receivable at a rate of 2.5% over base rate.