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Many business owners who have thought to use invoice factoring as a way to increase working capital decide it’s too expensive after they get their first proposal. Deciding to continue only based on factoring fee structure can be detrimental to market share, revenue cycle, and profits.
Although accounts receivable factoring has been around for centuries, many owners and financial executives aren ‘t educated about how it works. When factoring company receives the application and it appears the applicant is a good candidate for invoice factoring relationship, they will release the first proposal called Letter of Intent (LOI). Subject to due diligence, LOI defines the proposed contract, the going rate, and factors fee expressed as a percentage of the amount of adjusted accounts.
The last part of the Loi, fee structure, is often a concern for the potential factoring client. The truth is that Factoring is more expensive than traditional bank lines, although they are two different products. We have described the differences between the previous posts, emphasizing greater factoring services companies provide their customers. But the cost of funding is very important to those who can not get a bank loan and are considering using factoring to finance the company’s growth or survival.
When business owners get a proposal providing for Factoring fee will be 3% in thirty days, many will close the door immediately because the cost is too high. We urge decision makers to reject aspects of hand because of the cost. Instead, a deeper analysis should be conducted to compare the cost of capital to the opportunity cost of not continue with the arrangement. If there is no noticeable difference between the two, it may not be worth it to continue. But if it provides funding needed to get the company new customers or launch a new product line, incremental gains could well indicate that the high costs of financing is well worth it.
When analyzing the costs and benefits of invoice factoring, the decision-maker should first ask: Could immediate cash advance of 75% to 85% of my accounts will take advantage of to grow or improve it? If so, how would it affect the bottom line? The owner or CFO should then develop a spreadsheet containing estimated revenue and / or cost savings in connection with the progress and projected capital. For example, if the company has the opportunity to expand business with customers because of the infusion of working capital, the incremental gains exceed the cost of financing?
Create working capital through accounts receivable factoring can be a great way to jump-start the firm’s sales and profits. But the margin must be sufficient enough to cover Factoring charges. Opportunity must be considered before making a final decision to proceed or not.
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