Titusville Petroleum Company is considering pledging its receivables to finance an increase in working capital. Citizens National Bank will lend the company 80 percent of the pledged receivables at 2 percentage points above the prime rate (currently 10 percent).
The bank charges a service fee equal to 1.5 percent of the pledged receivables. The interest costs and the service fee are payable at the end of the borrowing period. Titusville has $2 million in receivables that can be pledged as collateral.
The average collection period is 45 days. Determine the annual financing cost to Titusville of this receivables-backed loan.