Reference no: EM132785557

Induss Inc. is considering obtaining funding through advances against receivables. Total annual credit sales are $600,000.00, terms are net 30 days, and payment is made on an average of 30 days. A local 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. Ikhlas Finance offers factoring on a nonrecourse 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 $10,000.00 per year.

(i) Calculate the effective interest rate and the average amount of funds available under pledging and under factoring.

(ii) What considerations other than cost should a firm account for in determining whether to enter the factoring agreement?