Integrated Logistics Solutions, based in Malaysia, is considering factoring its receivables. The firm has credit sales of RM470,000 per month and has an average receivables balance of RM870,000 with 60-day credit terms.

The factor has offered to extend credit equal to 87 percent of the receivables factored less interest on the loan at a rate of 1.6 percent per month. The 13 percent difference in the advance and face value of all receivables factored consists of a 3 percent factoring fee plus a 10 percent reserve, which the factor maintains. In addition, if Integrated Logistics Solutions decides to factor its receivables, it will sell them all so that it can reduce its credit department costs by RM1,800 a month.

a. What is the cost of borrowing the maximum amount of credit available to Integrated Logistics through the factoring agreement?

b. What considerations other than cost should Integrated Logistics account for in determining whether to enter the factoring agreement?