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Hello, i have a question regarding this subject.
“A factor would make an advance to Bold co of 80% of the revised book value of trade receivables. The interest rate on the advance would be 2% higher than the 7% that Bolf Co currently pays on its overdraft. ”
What I understood is that A factor would pay 80% of newly set receivables, and from this receivables interest, they could pay overdraft interest. And the interest what they get from receivables is 2% higher than the interest they pay for overdraft, it is benefit figure.
But the answer book deals with it by putting on the cost of factoring..
Where am I lost? Did I get something wrong? Help me please :’))
the interest is charged by the factor service remember, and therefore it
s a cost to Bold co,thats why it`s considered as costMoloantoa: Please do not answer in this forum because it is Ask the Tutor (but do please help people in the other F9 forum 🙂 )
Happyeun92: Moloantoa is correct. Using the factor will mean that Bold gets the money from receivables sooner, which saves them 7% overdraft interest. But they have to pay the factor interest for doing it, which is 9% (2% higher than the overdraft).
I do suggest you watch my free lectures on this. The lectures are a complete free course for Paper F9 and cover everything needed to be able to pass the exam well.
Ohhh thanks both of you 🙂
I did watch ur lectures but cant say I did…!! Need to have another look 🙂 thanks for your help
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