Can you answer PapaBear’s question about Cash Flow?:

MDM, Inc., is considering factoring its receivables. The firm has credit sales of $400,000 per month and has an average receivables balance of $800,000 with 60-day credit terms. The factor has offered to extend credit equal to 90 percent of the receivables factored less interest on the loan at a rate of 1½ percent per month. The 10-percent difference in the advance and the face value of all receivables factored consists of a 1-percent factoring fee plus a 9-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.
a.What is the cost of borrowing the maximum amount of credit available to MDM, Inc., through the factoring agreement?
b.What considerations other than cost should be accounted for by MDM, Inc., in determining whether to enter the factoring agreement?

Cash Flow Financing