• Skip to primary navigation
  • Skip to main content
  • Skip to primary sidebar
Free ACCA & CIMA online courses from OpenTuition

Free ACCA & CIMA online courses from OpenTuition

Free Notes, Lectures, Tests and Forums for ACCA and CIMA exams

  • ACCA
  • CIMA
  • FIA
  • OBU
  • Books
  • Forums
  • Ask AI
  • Search
  • Register
  • Login
  • ACCA Forums
  • Ask ACCA Tutor
  • CIMA Forums
  • Ask CIMA Tutor
  • FIA
  • OBU
  • Buy/Sell Books
  • All Forums
  • Latest Topics

20% off ACCA & CIMA Books

OpenTuition recommends the new interactive BPP books for September 2025 exams.
Get your discount code >>

Factor Financing

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Factor Financing

  • This topic has 9 replies, 2 voices, and was last updated 4 years ago by John Moffat.
Viewing 10 posts - 1 through 10 (of 10 total)
  • Author
    Posts
  • May 7, 2021 at 1:18 pm #619960
    Syed Ahsan Ali
    Participant
    • Topics: 136
    • Replies: 85
    • ☆☆☆

    Can you please state to me what is Factor Financing and how do we calculate that in the management of receivables?

    Is it correct to say that Factor Financing is that where the factor provides (mostly 80%) of the money to the company in advance whereas 20% will be returned back once they are collected from customers by the factor & we have to pay more than the normal overdraft interest rate for this service – usually 2% or 3% more than normal overdraft interest rate?

    May 7, 2021 at 2:38 pm #619971
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    What you have written is correct, except that there is no reason for it to be 80% – it could be any % depending on what was agreed with the factor (although you would obviously be told the % in an exam question).

    May 7, 2021 at 3:24 pm #619974
    Syed Ahsan Ali
    Participant
    • Topics: 136
    • Replies: 85
    • ☆☆☆

    can you please tell me how do I calculate the Factor Financing in the management of receivables questions in the exam?

    May 8, 2021 at 8:23 am #620006
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    I work through an example of this in my free lectures on the management of receivables.

    May 8, 2021 at 11:29 am #620042
    Syed Ahsan Ali
    Participant
    • Topics: 136
    • Replies: 85
    • ☆☆☆

    Sir, I am afraid I’ve watched all your lectures but I couldn’t find where u have calculated Factor Financing in the management of receivables or payables.

    Please could you tell me here about how do I calculate Factor Financing!

    May 8, 2021 at 3:50 pm #620065
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    The lecture working through example 3 in Chapter 5 of our free lecture notes is on factoring.

    You cannot expect me to type out my lectures again here 🙂

    Factoring is only relevant for receivables, and not for payables.

    May 8, 2021 at 6:51 pm #620085
    Syed Ahsan Ali
    Participant
    • Topics: 136
    • Replies: 85
    • ☆☆☆

    Maybe there is a misunderstanding because (in example 3 of notes) there is a (factor fee of 2% or factor will pay us 100% of debts) both of them I was not referring to as Factor Financing!

    Rather I was referring to the cost incurred because we’ve taken advance finance from the Factor (To which I was saying Factor Financing) such as in the question [Bold Co – Dec 2011] saying that

    “the interest rate on the advance would be 2% higher than the 7% that Bold Co currently pays on its overdraft”.

    Please correct me that we’ve taken advance money from the factor for which we are going to pay 2% more than the 7% of interest on overdraft (which is expensive though!).

    Will you please explain the calculation to me! 🙂

    May 9, 2021 at 9:22 am #620119
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    Example 3 is factor financing!!! Factor financing is when the factor gives us money in advance just as is the case in example 3.

    If the factor charges interest on the advance, then (using the figures from Bold) it will result in lower receivables and therefore overdraft interest will be saved at 7% (just as overdraft interest is saved in example 3), but there will be interest payable to the factor of 9% (2 % more than 7%) on the advance. You can either shoe two separate items – interest saved at 7% and interest paid of 9%, or you can just show the next extra cost of 2%. It makes no difference,

    May 9, 2021 at 5:31 pm #620161
    Syed Ahsan Ali
    Participant
    • Topics: 136
    • Replies: 85
    • ☆☆☆

    Please correct me with the calculation as I have done calculation based on your very last line where you said that “I can either show two separate items – interest saved at 7% and interest paid of 9%, or you can just show the next extra cost of 2%. It makes no difference”.

    [Bold Co – question]

    Interest saved at 7%
    1,457,534 x 7% = $102,027

    interest on advance at 9%
    2,042,466 x 0·8 x 0·09 = $147,058

    [difference between would be cost of $45,031)

    OR

    interest on advance at 2%
    2,042,466 x 0·8 x 0·02 = $32,680

    [Since we can do it both ways (as u said) but the difference between both of them showing results of $12,351 – Is this because of rounding difference?]

    May 10, 2021 at 7:11 am #620181
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54700
    • ☆☆☆☆☆

    The saving of 102,027 is being made because the average trade receivables is reduced to 35 days. This saving is nothing to do with the advance.

    Because the factor is also giving an advance of 80%, they will save 2,042,466 x 0.8 x 0.07 in overdraft interest. However, the will have to pay the factor interest on the advance of
    2,042, 466 x 0.8 x 0.09. The difference between the two is the extra net interest cost of $32,680.

  • Author
    Posts
Viewing 10 posts - 1 through 10 (of 10 total)
  • You must be logged in to reply to this topic.
Log In

Primary Sidebar

Donate
If you have benefited from our materials, please donate

ACCA News:

ACCA My Exam Performance for non-variant

Applied Skills exams is available NOW

ACCA Options:  “Read the Mind of the Marker” articles

Subscribe to ACCA’s Student Accountant Direct

ACCA CBE 2025 Exams

How was your exam, and what was the exam result?

BT CBE exam was.. | MA CBE exam was..
FA CBE exam was.. | LW CBE exam was..

Donate

If you have benefited from OpenTuition please donate.

PQ Magazine

Latest Comments

  • umangkumbhat on What is Assurance? – ACCA Audit and Assurance (AA)
  • ahmadhoney on How to register with ACCA?
  • John Moffat on Interest rate risk management (1) Part 5 – ACCA (AFM) lectures
  • osman-the-zephyr@ on MA Chapter 1 Questions Accounting for Management
  • adebusola on MA Chapter 1 Questions Accounting for Management

Copyright © 2025 · Support · Contact · Advertising · OpenLicense · About · Sitemap · Comments · Log in