Yoyo is a company providing delivery services for the food and beverages sector. Yoyo's management is considering the use of factoring to reduce the cost of credit control by €55,000 per annum. The identified factoring company will charge a fee of 2.5% of sales. It will provide an advance to company ABC of 80% of its receivables and charge interest on this advance of 10% per annum.

i.Assess whether it is financially beneficial for Yoyo to enter this factoring arrangement, considering that it currently has average trade receivables of €350,000 and annual sales of €1.2 million. Show all your workings. 

ii.Considering your answer to the previous point, as well as wider aspects, discuss the possible advantages and disadvantages of factoring. 

b.Explain why an organisation might decide to:

i.Lease an asset instead of buying it for its expansion plans.

 

ii.Finance expansion through retained earnings rather than a new issue of shares  
 

iii.Discard retained earnings as a viable option to finance an expansion plan.