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Is it true that in invoice discounting the factor may advance 80% of the value of sales immediately on invoicing which is also called “Advance Factor Financing” for which the company has to pay additional interest rate over the overdraft rate of interest so it is an extra cost for the company such as in the case of a question called Bold Co where factor has provided for 80% advances to the company for which the company has to pay additional interest rate over the overdraft rate of interest. Are they the same or different [please CORRECT?]
Is it correct to calculate Advance Factor Financing in two ways:
[Bold Co – Question June 2011][Step 1]
Additional interest on advance = 2,042,466 x 0·8 x 0·02 = 32,680[Step 2]
Additional interest on advance = 2,042,466 x 0·8 x 0·09 = 147,058Overdraft interest saved on advance = 2,042,466 x 0·8 x 0·07 = 114,378
[The difference between the two is the extra net interest cost of $32,680 which is the same result as in Step 1]
Since the Factor has advanced 80% of the finance, the company will save overdraft interest on Advance Finance.
Please comment whether two things are happening here:
Firstly, we save overdraft interest because we have reduced receivables
Secondly, we save overdraft interest on Advance Finance made by Factor of 80%[So, there are two savings being done by the company?]
What you have written is all correct.
Even if it was just basic factoring with them paying in advance, there would be a saving of overdraft interest because the debts are being collected sooner.
In addition to this, because they are receiving advances from the factor, they save more overdraft interest because of the advances received, but have to pay interest to the factor instead (an extra 2%).
It doesn’t matter whether you show just the extra 2% interest or, instead you show the overdraft saving of 7% and the interest paid to the factor of 9%. The end result is the same (and I actually prefer to show the two separately).
Sir, Please tell me that whether two things are happening here:
1) We save overdraft interest because we have reduced receivables
2) We save overdraft interest on Advance Finance made by Factor of 80%[Therefore, there are two savings being done by the company?]
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