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Hi Mr. John Moffat,
I am just learning about the trade receivable recently through your video, however, I am still not clear about the cost of financing for the trade receivable when the company sells goods to the customer on credit and when the company uses debt factoring which raises the finance cost for trade receivable and the amount received in advance from the debt factor.
Could you please explain the concept of the cost of financing for the trade receivable regarding the above case?
I am sorry that my English writing is not good and thank you for your support.
Best regards,
Toan
Suppose that receivables (for example) take 2 months to pay. If instead we use a factor and get the money immediately, then we can put the money on deposit and earn interest for 2 months. Of alternatively, if the company is overdrawn (and is therefore have to pay interest) then using a factor and receiving the money two months earlier means that we can reduce the overdraft two months earlier and so save two months interest.
It is the same logic as when we used discounted cash flow techniques in Paper MA (and use again in Paper FM in the later chapters of our free lectures.
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