Relevant Costs of In-house Management of Receivables

A. Cash discount 240*.02*0.4 1.92

Average collection period (10*.4+90*0.6)
Cost of bank finance 240*2/3*58/360*0.18 4.64
Cost of long-term funds 240*1/3*58/360*0.24 3.09
B. Cost of funds invested in receivables 7.73
C. Bad debt loss 240*.015 3.60
D. Contribution lost on foregone sales 20*0.2 4.00
E. Avoidable costs of sales ledger 1.00
administration and credit monitoring

Relevant Costs of Recourse Factoring

F. Factoring commission 260*.015 3.90
G. Discount charge 0.8*260*0.19*60/360 6.59
H.Cost of long-term funds invested in 0.2*260*0.24*60/360 2.08
receivables

Relevant Costs of Non-Recourse Factoring

I. Factoring commission 260*.035 9.10
J. Discount charge 0.8*260*0.19*60/360 6.59
Cost of long-term funds invested in 0.2*260*0.24*60/360 2.08
receivable

Cost-Benefit Analysis of Recourse Factoring

L. Benefits associated with recourse A+B+D+E 14.65
factoring
M. Costs associated with recourse F+G+H 12.57
factoring
N. Net Benefit L–M 2.09

Cost-Benefit Analysis of Non-Recourse Factoring

O. Benefits associated with non-recourse A + B + C + D+E 18.25
factoring
P. Costs associated with non-recourse I+J+K 17.77
factoring
Q. Net Benefit O–P 0.49

Since the net benefit associated with recourse factoring is higher than that of nonrecourse
factoring, the firm is advised to opt for recourse factoring.