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This may be a silly question but I’m doing question 84 in bpp revision guide. I won’t write out the question but I’m trying to calculate the saving a company makes on interest.
In the question if a factor pays advance for receivables the interest rate on the advance would be 2% higher then the 7% the company currently pays on overdrafts.
The answer calculates 2% of the advance and uses it as as cost rather then a saving.I can’t understand why it would cost us 2% on money we are receiving from the factor in advance.
Surely we are saving 7% that we would have had to pay if we didn’t have the money in advance.
I’m obviously missing something.
Thank you in advance.
You are missing something 🙂
By giving us money in advance the factor is giving us money before it has actually been collected from the customer – so they are lending us money and therefore will charge us interest. They will charge 9% interest – 2% more than we pay in overdraft interest.
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