Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Advance Factor Finance

- This topic has 3 replies, 2 voices, and was last updated 2 years ago by John Moffat.

- AuthorPosts
- May 11, 2021 at 12:35 am #620266
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?]

May 11, 2021 at 8:26 am #620281What 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).

May 11, 2021 at 2:17 pm #620304Sir, 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?]

May 11, 2021 at 5:00 pm #620322Yes. there are the two savings (but there is also the extra cost of the interest payable to the factor on the advances).

- AuthorPosts

- You must be logged in to reply to this topic.