Pee Ltd has been factoring its debtors for the past 5 years. The factor charges a fee of 2% and will lend up to 80% of the volume of debtors purchases for an additional ¾% per month. The firm typically has sales of GH¢500,000 per month, 70% of which are on credit. By using the factor, two savings are effected:

• GH¢2,000 per month that would be required to support a credit department, and
• A bad-debt expense of 1% on credit sales.

Pee Ltd’s bank has recently offered to lend it up to 80% of the face value of the debtors shown on the schedule of accounts. The bank would charge 8% per annum interest plus a 2% processing charge per GH¢1 of debtors lending. The firm extends terms of net 30, and all customers who pay their bills do so by the thirtieth of the month.

Required:

If the firm borrows on the average GH¢100,000 per month on its debtors, advise whether the firm should discontinue its factoring arrangement in favor of the bank’s offer.