Factoring Article Series
Factoring Rates
Why 3% for 30 Days Does Not Equate to 36% APR Interest
By John D. Hoff
The assertion that accounts
receivable factoring is too
expensive is usually based on a
lack of understanding of what
factoring rates represent.
Factoring companies, known as
factors, do not lend money at a
rate of interest. They supply
working capital to businesses
by purchasing receivables at a
discount from their face value.
As such, factoring “rates”
represent a percentage
discount in a sales transaction,
not an interest rate on a loan.
For example, if you have a
$10,000 invoice that will be
paid by your customer 30 days
from now, a factoring company
might offer to buy it from you
for $9,700 in cash (normally
80% is advanced in 24-48
hours, and the balance paid to
you when the invoice is actually
paid). If you agree to the
transaction, you have
discounted your $10,000
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invoice by $300, or 3% of its
face value.
If a factoring company tells you
that they will buy your invoices
at a rate of 3%, that rate is not
the interest rate on a loan, it’s
the percentage discount they
require in order to pay you cash
now, for invoices that they
won’t collect on for 30 days.
On average, factoring discount
rates range from .6% to 1.2%
for every 10 days an invoice
remains outstanding.
Factoring discount rates are
transactional rates, where the
amount of the discount is the
factoring company’s fee for
the sales transaction – no
different than the fees credit
card companies charge
merchants to advance them
cash on their credit card sales.
The misunderstandings about
the cost of factoring arise
when business owners and
financial professionals try to
compare loan interest rates to
transactional rates, which is
truly an apples-to-oranges
comparison.
For example, if your business sells
$100,000 worth of invoices to a
factor, and the factor’s fee is
$3,000 on invoices that are paid in
30 days, the tendency is to take
the 3% fee, multiply it by 12
months, and say, “Wow!, that
factor is pocketing a 36% return!”
That conclusion, of course, is
ludicrous. The factor doesn’t
collect $3,000 or 3% every month.
They collect the 3% fee once, as
the result of a single sales
transaction; no different than if
you were to sell your own product
or service to a client at a 3%
discount.
By analogy, if you give your
customers a 3% price discount
every month over the next year,
does that mean you will have
discounted your product or
service 36% by the end of the
year? Of course not! Or if your
profit margin is 10% every month,
www.CFSolutionsInc.net
Commercial Finance Solutions Inc., where Hoff is President and CEO, helps commercial businesses create consistent cash
flow and faster growth with accounts receivable factoring. CFS Inc. works with rapidly growing businesses, companies with
significant up-front costs, and businesses that receive payment 30-90 days after delivery of their product or service.
Factoring Article Series
your annual profit margin is still
10%... not 120%!
Dependable Cash Flow for
Growth
The major benefit of factoring,
which should not be lost in the
example above, is this - By selling
or factoring $100,000 worth of
unproductive invoices for a fee of
$3,000, your business is able to
obtain $80,000 in cash
immediately, within 24-48 hours!
That is debt-free working capital
that can be used to pay expenses
and to grow your company.
When the invoices are finally paid
at the end of 30 days, the
factoring company recovers the
advance and their fee, and sends
the balance of $17,000 to you, for
a total payout of $97,000.
Do your suppliers or vendors give
you 2% net 10 terms or provide
you with volume discounts? Many
businesses use their cash
advances from invoice factoring to
qualify for those supplier
discounts, thereby offsetting their
factoring fees. In the example
above, that would reduce your fee
from 3% to only 1%.
If factoring will provide you with
the reliable cash flow you need to
run and expand your business,
look at the factor’s discount rate
or fee as another cost of doing
business. Consider it a small price
to pay for having the working
capital you need, when you need
it, to generate profitable new
business and growth.
Is a 3% fee too much to pay for
the ability to recover your
working capital immediately? Ask
yourself, “How much more could
this company make if we didn’t
have to wait 30-90 days to collect
on our invoices?” In the example
above, factoring is cost-effective
for your business as long as your
company’s net profit margin is
greater than the factoring fee of
3%. Any additional business you
generate by accelerating your
receivables provides you with
additional profit.
888.224.9740
www.CFSolutionsInc.net
Commercial Finance Solutions Inc., where Hoff is President and CEO, helps commercial businesses create consistent cash
flow and faster growth with accounts receivable factoring. CFS Inc. works with rapidly growing businesses, companies with
significant up-front costs, and businesses that receive payment 30-90 days after delivery of their product or service.