Question

Assume your average credit sales are $50 million per year and average accounts receivable are $5 million. A factoring company offers you an agreement that it will be buying your accounts receivable at a 2.70% discount. Your bank offers you a credit at R% per year (actual yearly rate).
What would be the minimum R% for which you would choose factoring? That is, what is the rate R% offered by the bank at or below which you would rather borrow money from the bank instead of factoring

Answer 1

Since the fatcoring company will be buying the accounts receivable worth $5 million at 2.7% discount. It implies that for accounts receivable worth 5 million USD, the bank will offer only 4.865 million USD in return i,e, (5 million - 2.7% of 5 million)

The annual interest rate at or below which it makes sense to borrow from the bank instead would be 2.7% or rather 2.71 %, since its better to pay the bank for amount of credit withdrawn instead of losing out that money to the factoring company