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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?
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).
can you please tell me how do I calculate the Factor Financing in the management of receivables questions in the exam?
I work through an example of this in my free lectures on the management of receivables.
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!
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.
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! 🙂
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,
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% = $102,027interest 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?]
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.
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