You have been given the following information for Illiquid Ltd$,$ a company experiencing cash flow difficulties. Annual sales are expected to be $€2,000,000$ for this year.

Credit control department has confirmed that customers were originally given $30$ days credit period; however this has now extended out to $50$ days. Receivables are currently financed using bank overdraft at a rate $13\%$ per annum. Bad debts are currently $0\mathrm{.}33\%$ of total credit sales.

Rustic Factoring has offered to take over the management of our receivables and has provided the following information for our consideration:

Annual Fee $3\%$

Advance $75\%$ of our receivables at $15\%$ interest

Savings to be gained by factoring include: $€32,000$ in administration costs and it is estimated that remaining receivable balances will pay within the agreed $30$ day credit term, which will continue to be financed by a bank overdraft.

Cash sales from the new website to retail customers accounts for $10\%$ of total annual sales.

Required:

a$)$ Advise Illiquid Ltd if they should proceed with the factoring services offered by Rustic Factoring.

Answer rating: 100% (QA)

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