Unformatted text preview: resent a negative balance in the firm’s account, on which interest is
W Factoring Cost Factoring costs include commissions, interest levied on
advances, and interest earned on surpluses. The factor deposits in the firm’s
account the book value of the collected or due accounts purchased by the factor,
less the commissions. The commissions are typically stated as a 1 to 3 percent discount from the book value of factored accounts receivable. The interest levied on
advances is generally 2 to 4 percent above the prime rate. It is levied on the actual
amount advanced. The interest paid on surpluses is generally between 0.2 and 0.5
percent per month. An example of the factoring process is included on the book’s
Web site at www.aw.com/gitman.
Although its costs may seem high, factoring has certain advantages that make
it attractive to many firms. One is the ability it gives the firm to turn accounts
receivable immediately into cash without having to worry about repayment.
Another advantage of factoring is that it ensures a known pattern of cash flows.
In addition, if factoring is undertaken on a continuing basis, the firm can eliminate its credit and collection departments. The Use of Inventory as Collateral
Inventory is generally second to accounts receivable in desirability as short-term
loan collateral. Inventory normally has a market value that is greater than its
book value, which is used to establish its value as collateral. A lender whose loan
is secured with inventory will probably be able to sell that inventory for at least
book value if the borrower defaults on its obligations.
The most important characteristic of inventory being evaluated as loan collateral is marketability, which must be considered in light of its physical properties. A warehouse of perishable items, such as fresh peaches, may be quite marketable, but if the cost of storing and selling the peaches is high, they may not be
desirable collateral. Specialized items, such as moon-roving vehicles, are not
desirable collateral either, because finding a buyer for the...
View Full Document