Fornax Business Services plc. provides cleaning services to offices, hotels and restaurants. The sales revenue of the business is 18 million and this is unlikely to change in the foreseeable future. All sales are on credit and the business is finding that managing credit customers is becoming increasingly difficult. In recent years, bad debts have risen to 175,000 per year and the average credit period taken by customers has risen to 90 days, even though the stated terms of credit are 30 days. This has led to a strain on the liquidity of the business.

At present the business has a bank overdraft of 6.6 million on which it pays interest at the rate of 12 per cent per year. The directors of Fornax Business Services plc. would like to see a reduction in the size of the overdraft and are currently investigating the possibility of employing the services of a factor. A debt factoring business has offered to take over the sales records of the business and will charge a fee of 3 per cent of sales revenue per year for this service. In addition, the factor has agreed to advance an amount to the business equivalent to 80 per cent of the trade receivables outstanding at rate of 10 per cent per year and Fornax will make use of this facility. It is believed that employing the factor will eliminate bad debts and will reduce the average credit period to 30 days. It will also eliminate the need for a credit control department and this will result in savings of 120,000 per year. Required: Calculate the net annual cost, or savings, to the business of employing the services of a debt factor.