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Aunt Tilly's Feeds, Inc.

Aunt Tilly's Feeds, Inc. is considering obtaining funding through advances against receivables. Total annual credit sales are $600,000, terms are net 30 days, and payment is made on an average of 30 days. Western National Bank will advance funds under a pledging arrangement for 13 percent annual interest. On average, 75 percent of credit sales will be accepted as collateral. Commodity Finance offers factoring on a non-recourse basis for a 1 percent factoring commission, charging 1.5 percent per month on advances and requiring a 15 percent factor's reserve. Under this plan, the firm would factor all accounts and close its credit and collections department, saving $10,000 per year.

(a) What is the effective interest rate and the average amount of funds available under pledging and under factoring?

(b) Which plan do you recommend? Why?

Solution Summary

Compute for effective interest rate and average available funds for Aunt Tilly's Feeds, Inc. if it will obtain funds by accounts receivable pleding and nonrecourse factoring