Factoring Costs & Mitigation

///Factoring Costs & Mitigation
Factoring Costs & Mitigation2016-10-14T00:09:17+00:00


Concerned that Factoring may be too expensive? Let’s take a look…

Factoring Costs & Pricing
            It’s no secret that the most preferred financing in terms of cost and interest rates is traditional bank financing
            However, with banks under increasing regulatory scrutiny, demand to tighten underwriting guidelines, and with the recent Frank~Dodd Act, banks are timid about providing working capital lines to companies that really need them.
            Factoring is one of the most diverse lending products when it comes to pricing. In my many years in this industry I have probably seen 10 to 12 different models and ways Factors price the cost of their funds to the client.
               Each time I see another pricing model that is just a bit different, or has a new twist to it, I quickly realize that like the others, it is simply designed to confuse, complicate and cost the client more. I say this with all sincerity as there is simply no reason other than to give a simple price. In the end, the result is the same; why disguise it?
               Typical Factoring prices, when you sort out all of their various pricing formulas boil down to an average range. That range is between 2.0% and 3.5% of the face value of the invoice per 30 days you use their money.
                The Good Factors, who are few, will break down those 30 day “buckets” into either 10 day or 1 day price buckets. Single day pricing is hard to get and a prospective client has to bring both size in terms of the dollars they will factor each month, and quality in terms of the quality of their own customers. A great pricing model is a 10-day bucket, with NO other fees.
              With 30 day price buckets, if the price quoted were 3% for each 30 days, and the invoice paid off on day 34 (4 days into bucket #2 of 30 days), then you end up paying 6% (the cost for 60 days, when only 34 were used. A 10 day model is much fairer.

How to Mitigate Finance Costs
                 Did you know with some creativity, and logic, you can often not only entirely mitigate the cost of Factoring, but you can go even further: You can increase your profit margins using Factoring. Here are some steps to leverage your Factoring relationship, assuming you’re using one of the Good Factors, to not only improve your business cash flow, but to improve your profit. 

Example of how to not only mitigate finance costs, but make money from it.
  1. Assume you are a Manufacturer
  2. Assume your Raw Materials Costs of Goods is 50%
  3. A large client places a $100,000 order with you
  4. Your Materials therefore will cost you $50,000
  5. You have a prior order you filled for the same items and amount of $100,000, therefore you have an invoice open and due to you for the same.
  6. You present the invoice to us to be Factored.
  7. We advance you 80% / $80,000
  8. Our rate is 2.5% for 30 days (actually it is in 10 day buckets almost always, so 0.833% / 10 days)
  9. You take the $80,000 we have advanced you, now having cash in hand and approach your suppliers. You offer then a COD / Cash price for your next order.
  10. Your supplier happily agrees, extending you a 10% cash discount.
  11. Your next order, you have now saved $5,000 off of the $50,000 materials cost.
  12. You Factored the $100,000 invoice for 30 days at a rate of 2.5%, for a total finance cost of $2,500. You saved $5,000 using that cash. You now have a net gain of $2,500 or 2.5% net profit increase on the order you employed the cash from.
Factoring can both provide cash and peace of mind, but it can also be used to make money.

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