Towers Arcades currently borrows $560,000 per month from its bank on the strength of receivables, which average $800,000 per month. Credit terms are net 30. The bank's interest rate is 10 percent annually, with an additional charge of .5 percent to process the accounts receivable used as security. The processing charge is based not on the loan amount but on the dollar value of the underlying receivables pledged as collateral.
Towers has an offer from a factoring company to buy all of its receivables without recourse for a fee of 2 percent of the value of the receivables purchased.
The factoring firm is prepared to lend Towers Arcades $560,000 per month at an interest rate of 11 percent. The factoring company would eliminate Tower's credit department expense, including bad debts costs, of $15,000 a month. Should Towers Arcades switch to the factoring company?