Accounts Receivable Factoring Examples

Factoring ExamplesFor some business owners accounts receivable factoring will provide solutions when all other avenues fail.

Of course the greatest area of concern is usually the factoring fees leading many to wonder,

“How much will it cost to use invoice factoring services?”

Here are some factoring examples that address the cost of factoring…

Factoring Example I

  • Invoice Amount: 10,000
  • Cost to Factor (Fee): 2% or $200
  • Net to seller (after reserve and invoice is paid): $9,800

Factoring Example II

  • Invoice Amount: 10,000
  • Cost to Factor (Fee): 5% or $500
  • Net to seller (after reserve and invoice is paid): $9,500

While the cost varies by factoring companies, most businesses will look at the fees as the expense of doing business in exchange for immediate access to funds. Some businesses choose to factor all invoices while others take advantage of factoring services on an as needed basis.

So how do companies with low profit margins offset the fees? They take advantage of the ability to pay for their goods or services at a discount.

Consider the same invoice in the first example where a $10,000 invoice was factored at a cost of 2% or $200. With the cash advance the business decides to pay bills taking advantage of prompt payment discounts:

  • Goods or Services: $5,000
  • Take advantage of a “2% 10, Net 30”* = Save $100
  • Total Paid for Goods or Services: $4,900
  • Overall Realized Cost of Factoring: $100 or 1%

*Oftentimes invoices will allow for a slight deduction if paid in full within 10 days. If you don’t see this on the bill, try asking for it!

Invoice factoring is not only about receiving an advance on your invoice, it is also the ability to pay your bills promptly and receive a discount.

Comments

  1. You referenced the first factoring example:
    Invoice Amount: $10,000
    Cost to Factor (Fee): 2% or $200.00
    Net to seller (after reserve and invoice is paid) $9,800.00

    Same factoring example except client takes advantage of prompt payment discount:
    Invoice Amount: $10,000
    Cost to Factor (Fee): 2% or $200.00
    Net to seller (after reserve and invoice is paid) $9,800.00
    Client takes advantage of prompt payment discount of 2% 10, net 30
    Total Paid for Goods or Services: $9,800.00
    Overall Realized Cost of Factoring: $0

    Isn’t this the correct answer??

    If so (and I believe that it is), the client actually received immediate access to her/his cash at ‘No Cost’. Also, since there was no cost, when other means of available cash usually come as some sort of cost, in comparison this could translate into an actual profit.

    Perhaps then, a negotiated 3% 5, net 30 arrangement (hey… even their suppliers would like their cash sooner than 10 days and may be willing to pay for it) may even produce a greater profit… all as a result of one factoring arrangement.

    Now… multiply this by the number of suppliers the client has…

    STAY BLESSED!

    …Ray

    • Hello Ray,

      You’re right! It could be no cost if the discount savings equal or exceed the factoring cost.

      In our example we assumed the business owner paid a $5,000 bill receiving the prompt payment discount (rather than a $10,000 bill). This seemed realistic since the factoring company might only advance 80% of the $10,000 invoice, keeping 20% in reserve until the invoice is paid. The business owner might also use some of the funds to meet payroll or other expenses.

      Your reasoning is right on track. If a business owner wisely manages the factoring advance to save money or make additional profits it could be considered no cost!

      Thanks for reading and commenting at Factoring Investor!

  2. You’re welcome.

    Now if I could just expand this an intsy bintsy step or two further…

    Now having identified a supplier who has proven her/his willingness to provide this 3% 5, net 30 arrangement because they would prefer their cash sooner than 10 days AND would be willing to pay for it, how willing would you think that supplier would be in either supplying or sharing their client list in hopes of getting more of their cash sooner or later?

    See the secondary growth pattern of the factoring broker’s business and income? The primary growth pattern would, of course, result in approaching the other suppliers of the primary factoring client.

    Just my thoughts.

    STAY BLESSED!

    … Ray

  3. A Business can also benefit from Accounts Receivable Factoring if for example the money that is tied into their receivables can allow them to bid on new business opportunities that otherwise would not be feasible.

    Many Manufacturing and Service businesses need capital outlays in order to render their services or products. If the business has to invoice too many of their Clients, when prime business opportunities manifest themselves, it can be difficult for them to take advantage as their available capital must be dispersed for overhead and other business obligations.

  4. Acha jude nyah says:

    hi
    the calculation in the examples are good and they speak

  5. Hello everyone, I’m a business owner that has struggled for years in business trying to find funding for my company with loans after loans. Well by doing so my company and my personal credit has been destroyed. my kind of work is Government Funded programs for 12 years. Of course like anything once you’ve done the same thing for a while your just hooked to only that. Well the agencies I work for like I said earlier are government funded and the money is guaranteed. The only problem for me is they are a 30-45 day payment turnover, well the homes we do average 5 to 10,000 dollars each and labor and material are about 30-40% of each job. Leaving about a 70-65% profit. My problem is the work is great and the payoff is nice if I had a factoring investor or company to give us a shot. I have been in business for far to long not to realize or have been told that All I have ever needed was a factoring company, or factoring investor. So if any private factoring investor out there wants to become money partners and have prosperous relationship please send me a email @ reasonablehci@gmail.com Suskin Lockett Jr.

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