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?© BrainMass Inc. brainmass.com September 22, 2018, 3:20 am ad1c9bdddf - https://brainmass.com/business/capital-budgeting/aunt-tilly-s-feeds-inc-584046
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