Reference no: EM132522924

Factoring ABC Co has sales of £50m for the previous year.

1. Receivables at the yearend were £7,808,219 and receivables are financed using an overdraft costing 6% per annum.
2. Receivables days are 57.
3. The current receivables financing cost is £468,493.
4. ABC Co is now considering using a debt factor. It has been in negotiations with two factors who are offering different terms.
5. The first factor will operate on a service-only basis. ABC would be able to make administrative savings of £50,000 from this service.
6. The factor also undertakes to pay all invoices within 30 days instead of the current 57.
7. For its services the factor will charge a fee of 0.5% of ABC Co's revenue.
8. The second factor will advance 85% of the book value of ABC Co's invoices immediately at a cost of 7% in addition to administering the receivables ledger.
9. The remaining 15% of sales will continue to be paid on average over 57 days.
10. The factor promises administrative savings of £100,000 and will charge a fee of 0.25% of all sales.

Question 1: Determine whether either of the factor offers is acceptable to ABC Co.