Short-Term Loan vs. Factoring Analysis
Quiz 2 – tbs.aq.rec.inventry.001_2017, Short-Term Loan vs. Factoring Analysis
Onco, Inc. suffered a fire, which resulted in an uninsured loss of one of its warehouses and the inventory therein. Prompt recovery of operations required an immediate and unexpected cash outlay, which caused a liquidity problem for Onco.
To address its liquidity problem, Onco is considering two alternatives: (1) a short-term loan using its accounts receivable as security, or (2) factoring its accounts receivable. To assess those alternatives, Onco solicited and received three proposals, a loan proposal from its commercial bank, Comco; and factoring proposals from two different financial firms that factor accounts receivable, Factorco, Inc. and Quickcash, Inc.
Onco has summarized the financial terms of each proposal; these summaries are provided in the exhibits above. Provided is a summary of Comco’s proposal; a summary of Factorco’s proposal; and a summary of Ouickcash’s proposal.
In addition to the information provided in each proposal, Onco has developed the following information:
- Average credit sales per month = $400,000.
- Onco will utilize the full amount of its average monthly credit sales to support its cash needs.
- Average length of days accounts receivable are outstanding = 30 days.
- Average bad debt expense as a percentage of credit sale = 2%.
- Accounts receivable collection costs per month = $6,500.
As a member of your firm’s consulting team that services Onco, you have been asked to analyze the three proposals and determine the net cost associated with each proposal, which will be used to determine which proposal is the most economical. To make that determination, you are to provide the net cost of each proposal below.