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Factoring Problems-Solutions

Based on the financial analysis provided, Indbank factoring provides the highest net benefits among the receivables management alternatives for Sunlight Industries. The key factors are: - In-house management costs are Rs. 57.15 lakhs - Canbank factoring proposal costs are Rs. 36.6 lakhs (recourse) and Rs. 54.4 lakhs (non-recourse) - Indbank factoring costs are Rs. 29.705 lakhs (recourse) Comparing the options: - Indbank recourse factoring provides a net benefit of Rs. 15.5 lakhs versus Rs. 8.6 lakhs for Canbank -

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Chinmayee Choudhury
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1K views

Factoring Problems-Solutions

Based on the financial analysis provided, Indbank factoring provides the highest net benefits among the receivables management alternatives for Sunlight Industries. The key factors are: - In-house management costs are Rs. 57.15 lakhs - Canbank factoring proposal costs are Rs. 36.6 lakhs (recourse) and Rs. 54.4 lakhs (non-recourse) - Indbank factoring costs are Rs. 29.705 lakhs (recourse) Comparing the options: - Indbank recourse factoring provides a net benefit of Rs. 15.5 lakhs versus Rs. 8.6 lakhs for Canbank -

Uploaded by

Chinmayee Choudhury
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as XLSX, PDF, TXT or read online on Scribd
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Under an advance factoring arrangement Bharat Factors Limited (BFL) has agreed

to advance a sum of Rs.14 lakh against the receivables purchased from ABC
Limited. The factoring agreement provides for an advance payment of 80 percent of
the value of factored receivables and for guaranteed payment after three months
from the date of purchasing the receivables. The advance carries a rate of interest of
16% p.a. compounded quarterly and the factoring commission is 1.5 percent of the
value of factored receivables. Both the interest and commission are collected
upfront.

Solution
1. Compute the amount actually made available to ABC Limited.
Value of factored receivable (= 14/0.8) 17.50

Maximum permissible advance 14.00


Less: Commission @ 1.5 percent (= 17.5 x 0.015) 0.26
13.74
Less: Discount charge (14 x 0.16 x 90/360) 0.56
Funds made available to ABC Limited 13.18

2. Calculate the effective cost of funds made available to ABC Limited.


Discount charge expressed as a percentage of
funds made available to ABC Limited 4.25%

the effective rate of interest per quarter is 4.25%


The annualized rate of interest 18.11%

Put differently, the annualized cost of funds made available to ABC Limited is 18.11%.

3. Assume that the interest is collected in arrear and the commission is


collected in advance. Calculate the effective cost of funds made
available to ABC Limited.

Maximum permissible advance 14


Less: Commission payable up-front (= 17.5 x 0.015) 0.2625
Funds made available to ABC Limited 13.7375

Interest charge collected in arrear = (14 x 0.16 x 9 0.56

Interest charge expressed as a percentage of


funds made available 4.08%
Annualized interest cost = [((1+4.08)^ 4) – 1] x 100 17.33%
agreed
C
ercent of
months
nterest of
nt of the
ed

ted is 18.11%.
The relevant costs associated with the in-house management of receivables and the alternative for

Relevant Costs of In-house Management of Receivables

A. Cash discount = 240 x 0.02 x 0.4 1.92

Average collection period = (10 x 0.4) + (90 x 0.6) 58

Cost of bank finance = 240 x 2/3 x 58/360 x 0.18 4.64

Cost of long-term funds = 240 x 1/3 x 58/360 x 0.24 3.093333


B.Cost of funds invested in receivables 7.733333
C.Bad debt loss = 240 x 0.015 3.6
D.Contribution lost on foregone sales 4
E.Avoidable costs of sales ledger administration 1

Relevant Costs of Recourse Factoring

F. Factoring commission = Rs.260 x 0.015 3.9


G Discount charge = 0.8 x 260 x 0.19 x (60/360) 6.59
H. Cost of long-term funds invested in receivables =
0.2 x 260 x 0.24 x(60/360) 2.08

Relevant Costs of Non-Recourse Factoring

i. Factoring commission = 260 x 0.035 9.1


J. Discount charge = 0.8 x 260 x 0.19 6.586667
K.Cost of long-term funds invested in receivable = 0.2
x 260 x 0.24 x 60/360 2.08

Cost-Benefit Analysis of Recourse Factoring

L.Benefits associated with recourse factoring = A + B +


D+E= 14.65333
M. Costs associated with recourse factoring = F + G + H 12.57
N. Net Benefit = L – M 2.09
Cost-Benefit Analysis of Non-Recourse Factoring

O. Benefits associated with non-recourse factoring = A


+B+C+D+E 18.25333
P. Costs associated with non-recourse factoring = I + J + 17.76667
Q. Net Benefit = O – P 0.486667

Since the net benefit associated with recourse factoring is higher than that of nonrecourse
factoring, the firm is advised to opt for recourse factoring
nd the alternative forms of factoring are listed below:
nonrecourse
Financial analysis of receivables manageme
A. in house management

a) cash discount (800*0.40*0.02) 6.4


b)bad debts (800*0.015) 12
c) opportunity cost(75*0.205) foregone contribution on lost sa 15.375
d) cost of sales ledger administration 9
e) cost of investment in r eceivables 14.37
total cost 57.15
average collection period (0.40*10 days)+( 0.60*75 days) 49
investment in debtors (800*(49/360)) 108.9
cost of investment in debtors 14.37

B. Canbank factor proposal

amount of advance 750.728


amount of advance 701.904

with recourse
Factoring commission ` 21.9
discount charges 13.1
cost of long term funds invested in debtors 1.6
36.6

C. Indbank factoirng proposal:

amount of advance 721.812


amount of advance 674.8

with recourse
Factoring commission ` 15.75
discount charges 12.03
cost of long term funds invested in debtors 1.925
29.705
Decision analysis ( recourse factoring)
can bank
benefits (57.2-12 bad debts to be forn by the company) 45.2
cost 36.6
net benefits 8.6

decision analysis (non- recourse factoring)


can bank
benefits (57.2+1.1 bad debts to be forn by the factor) 58.3
cost 54.4
net benefits 3.9

advise to the CFO os sunlight industries would be to accept the proposal of indbank factor for the r
of receivables management alternatives

1.1 Additional badebts due to increase (75 cr) sales

0.205 net bad debts


75 cr is additional sales
cr

bank credit: long term source securisation


factoring
housing
cibil
credit r ating
with recouse
wothout recouse

without recouse
39.4
12.9
2.16
54.4

securitisation

recourse
non recourse

without recouse
31.5
11.809
2.5025
45.8115
indbank
45.2
29.7
15.5

g)
indbank
58.3
45.8
12.5

of indbank factor for the recouse factoring.

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