Factoring accounts receivable involves the outright sale of a firms accounts to a financial institution called a factor. A factor is a firm that acquires the receivables of other firms. The factoring institution might be a commercial finance company that engages solely in the factoring of receivables (known as an oldline factor) or it might be a commercial bank. The factor, in turn, bears the risk of collection and, for a fee, services the accounts. The fee is stated as a percentage of the face value of all receivables factored (usually 1 to 3 percent). The factor firm typically does not make payment for factored accounts until the accounts have been collected or the credit terms have been met. Should the firm wish to receive immediate payment for its factored accounts, it can borrow from the factor, using the factored accounts as collateral. The maximum loan the firm can obtain is equal to the face value of its factored accounts less the factors fee (1 to 3 percent) less a reserve (6 to 10 percent) less the interest on the loan. For example, if $100,000 in receivables is factored, carrying 60-day credit terms, a 2 percent factors fee, a 6 percent reserve, and interest at 1 percent per month on advances, then the maximum loan or advance the firm can receive is computed as follows: Face amount of receivables factored $100,000 Less: Fee (0.02 * $100,000) (2,000) Reserve (0.06 * $100,000) (6,000) Interest (0.01 * $92,000 * 2 months) (1,840) Maximum advance $ 90,160 Note that interest is discounted and calculated based on a maximum amount of funds available for advance ($92,000 = $100,000 - $2,000 - $6,000). Thus, the effective cost of credit can be calculated as follows: APR = $1,840 + $2,000 $90,160 * 1 60>360 = 0.2555 = 25.55%. BUT CHANGE THE FEE TO 4%