ABC Limited is a trading company. Its annual turnover is ₹4000 lakhs out of which ₹2800 lakhs is on credit. Its average collection period is 90 days and presently its receivable collection cost is ₹35 lakh p.a. The compa

ABC Limited is a trading company. Its annual turnover is ₹4000 lakhs out of which ₹2800 lakhs is on credit. Its average collection period is 90 days and presently its receivable collection cost is ₹35 lakh p.a. The company needs immediate funds to finance its growth projects and it has an option to take short-term loans at interest rate of 18% p.a. Recently, one of the factoring company visited the Chief Executive of ABC Limited and offered him to provide the factoring services on recourse basis. As per terms of factoring arrangement, factoring company will provide for an advance payment of 80% (maintaining factor reserve of 20% to provide for disputes and deductions relating to the bills assigned) of the value of factored receivable and for guaranteed payment after 90 days from the date of purchasing the receivables. The advance will carry a rate of interest of 12% per annum. In addition to interest, factoring company will charge factoring commission @ 2.5% of the value of factored receivables. Both the interest and commission shall be collected by factoring company on upfront basis. You are the Company Secretary of ABC Limited and you have been requested to prepare a report containing the following aspects. Whether your advice would be changed if the clause of 'on recourse basis' is negotiated 'on non-recourse basis' keeping the other terms of agreement with factoring company as same. The experience indicates that bad debt losses on sales are 2% of sales.