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The second step in the bank's evaluation process is to analyze the historical
payment patterns of the customers. After calculating the average payment
period for each customer (given in the last column of Table 15W.2), Second
National Bank decides to eliminate customer B, whose account, although not
currently overdue, normally requires 60 days to collect. Having eliminated
the accounts of customers B, C, E, and I, the bank is left with $45,000 of
acceptable accounts from customers A, D, F, G, and H (who owe $10,000,
$4,000, $6,000, $14,000, and $11,000, respectively). Crowe Company
therefore has $45,000 of acceptable accounts receivable collateral. Each
account that is used as collateral is marked in Crowe Company's ledger, and
a list of the billing dates and amounts is kept by the bank.
a
Number of days since the beginning of the credit period.
The firm receives $891 now and expects eventually to receive the $80
reserve. The exact method that is used to calculate the amount of the
advance will vary, depending on the terms of the factoring agreement.
Because Graber Company must pay the interest in advance, the effective
annual interest cost of this transaction is not 12 percent but 12.12 percent
[($9 ÷ $891) x 12]. Of course, if one includes both the factoring commission
of $20 and the interest of $9, the annual factoring cost for the transaction
would be approximately 39 percent [($29 ÷ $891) x 12].
The effective interest rate on this loan is 2.875 percent ($2,300 ÷ 80,000) for
1 month. The effective annual cost of the loan is 34.5 percent (2.875% x 12)
assuming that this is a single transaction.