(Cost of factoring) MDM Inc. Is considering factoring its receivables. The firm has credit sales of $450,000 per month and has an average receivables balance of $900,000 with 60-day credit terms. The factor has offered to extend credit equal to 93% of the receivables factored less interest on the loan at a rate of 1.8 percent per month. The 7 percent difference in the advance and the face value of all receivables factored consist of a 2 percent factoring fee plus a 5 percent reserve, which the factor maintains. In addition, if MDM Inc. decides to factor its receivables, it will sell them all, so that it can reduce its credit department costs by $1,500 a month. What is the cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement? Note: assume a 30- day month and 360 day year.
The cost of borrowing the maximum amount of credit available to MDM Inc. through the factoring agreement is ?%