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Oftentimes people compare factoring fees to automobile or mortgage lending rates and factoring initially appears expensive.  They tend to annualize the points charged by the factor - equating 3 points per month to an interest rate of 3% or 36% annually. This is both an incomplete and incorrect comparison.  balance

First, factors purchase accounts receivable at a discount. They do not lend money.  (Similar to a sale of a personal vehicle between two individuals.) 

Second, the “paper” (accounts receivable invoices) is short-term in nature and management intensive versus a bank loan, which is secured against some stable asset and usually advanced once.  Conversely, factors are continuously advancing and collecting accounts receivable, providing clients with ongoing reports, credit, due diligence, and personalized account management services.   

So, let’s look at some examples: ·       

Think of a business which typically offers a 2% discount for early payment of its invoice – say within 10 days of issue.      

If this 2% discount for payment within 10 days is annualized (similar to the thought processes mentioned above) using the thirty-six,10-day periods in a year, 72% interest has been lost.       

But — are you really losing 72% for early payment? Of course not. 

Another example: 

  • You get a factoring advance that costs 3 points per month but that consistent cash flow from factoring helps you to generate more business at your 20% profit margin.

  • So, would it not have cost you 17% by not factoring?

 QUESTION:        What amount of return is generated when a company has an order but no way to fill it?   

QUESTION:          How much return does a $30 to $35 overdraft fee generate? 

QUESTION:           How much money is a business owner and/or his employees earning when they are running after payments from customers? 

All this being said, a company can mitigate any factoring fees incurred by being creative.  

For instance, with ready cash, some companies have been able to negotiate a larger discount (than their factoring fees) with their suppliers by paying those suppliers faster with their ready cash – thus, more than offsetting the factoring fees!  And, I’m sure there are many more creative ways that a smart business owner can figure out so that growth and sales opportunities are not left at their door! 

I submit that when a business owner truly focuses on ALL the positive aspects and benefits which will occur as a result of factoring and maintaining a consistent cash flow, the choice of whether or not to factor will be clear.

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