Sunlight Industries Ltd manages its accounts receivables internally by its sales and credit department. The cost of sales ledger administration stands at Rs 10 crores annually. It supplies chemicals to heavy industries. These chemicals are used as raw material for further use of are directly sold to industrial units for consumption. There is good demand for both the types of uses. The company has a credit policy of 2/10, net 30. Past experience of the company has been that on average 40 per cent of the customers avail of the discount by paying within 10 days while the balance of the receivables are collected on average 90 days after the invoice date. Sunlight Industries also has small dealer networks that sell the chemicals. Bad debts of the company are currently 1.5 per cent of total sales. The projected sales for the next year are Rs 1000 crores.

Sunlight Industries finances its investment in debtors through a mix of bank credit and own long term funds in the ratio of 70:30. The current cost of bank credit and long-term funds are 13 per cent and 15 per cent respectively.

With escalating cost associated with the in-house management of debtors coupled with the need to unburden the management with the task so as to focus on sales promotion, the CEO of Sunlight Industries is examining the possibility of outsourcing its factoring service for managing its receivables. He assigns the responsibility of Anita Guha, the CFO of Sunlight. Two proposals are on hand with a guaranteed payment within 30 days.

Proposal from Fine bank Factors Ltd: The main elements of the proposal are: (i) Guaranteed payment within 30 days (i) Advance, 88 per cent and 84 per cent for the resource and non-recourse arrangements respectively (iii) discount charge in advance, 21 per cent for with resource and 22 per cent without resource (iv) Commission, 4.5 per cent without resources 2.5 per cent and with resource.

Proposal from Rough bank Factors: (i) Guaranteed payment within 30 days (ii) Advance, 84 per cent with resource and 80 per cent without resource (iii) Discount charge upfront, without resource 21 per cent and with resource, 20 per cent and (iv) Commission upfront, without resource 3.6 per cent and with resource 1.8 per cent.

The opinion of the Chief Marketing Manager is that in the context of the factoring arrangement, his staff would be able to exclusively focus on sales promotion which would result in additional sales of 10% of projected sales.

Required: The CFO of Sunlight Industries seeks your advice as a financial consultant as an alternative proposal. What advice would you give?