A Common Financing Misperception

A common misconception surfaced this week while discussing the process of factoring with a professional acquaintance.

We were talking costs and my friend asked about typical rates that Universal Funding offers. Of course, that’s a question that varies depending on the client, the client’s customers, the volume of financing and the size and frequency of invoices. However, it’s pretty safe to say the majority of our clients enjoy rates somewhere between 1 to 2 percent for 30 day terms.

My friend, like many others looking into invoice factoring, assumed he could multiply that rate by 12 and figure out the yearly cost of factoring is between 12 and 24 percent.

That is not correct, and here’s why:

First, it’s important to remember that invoice factoring is not a loan, and thus the rate charged is not an interest rate. It’s more like a discount fee. Let’s say, to keep things simple, that my friend has a business that factors a $100,000 invoice every month. Let’s also assume the customer pays within 30 days and the rate is a flat 1 percent.

The financing cost, then, is $1,000 for that 30 days.

Let’s also assume that my friend does this same transaction every month for 12 months. That translates to $1.2 million in invoices, and $12,000 in factoring fees. Do the math and we’re able to show my friend that even over the course of a year, the rate is still 1 percent, not 12 percent.

That’s pretty inexpensive business cash! Plus, factoring can easily pay for itself through reduced administration costs and by taking advantage of early payer discounts offered by vendors. Not only that, but the increased cash flow can allow for business growth, an increase in hiring and ultimately, more profit.

If you would like more information on how factoring can benefit you and your business, contact us today and we’ll happily run some numbers and give you an idea of how we can help.

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