Is Groupon Marketing, Factoring, or Loan Sharking?

factoring fees vs grouponHow Groupon makes Factoring Invoices look downright cheap for small business financing.

As consumers we love getting our Groupon! Who doesn’t want a 50% or better discount?

Groupon delivers coupon deals straight to your email in box. Anything from skydiving to liposuction, nachos to nighties, and burgers to basket weaving. It catapulted the success of Groupon, but is it really a good deal for business owners?

I just finished reading a business advocate article that compared the popular daily deals to a very expensive loan aka loan sharking. At first it seemed a bit harsh – until you start penciling out the numbers.

Crunching the Daily Deal Numbers

The lure or sales pitch of daily deals like Groupon is… marketing with no upfront payment!

This is especially appealing to cash strapped business owners wanting more customers. However it can be a very expensive proposition. Generally the numbers break down as:

  • 50% Discount to customer
  • 25% Fee to deal provider
  • 25% Net to business owner

On top of that the business owner has to wait to get their portion, in installments, over time. The arrangement will differ by agreement but a common example was 1/3rd in 5 days followed by 1/3rd in 30 days and the balance within 60 days. So on $100,000 of sales it would be:

$100,000

-$50,000 Discount

-$25,000 Fees

=$25,000 Received by Business Owner

(33% or $8,333 immediate advance with balance paid out over 60 days)

In effect the business owner is getting an advance on future cash flow.

Comparing Factoring Fees

Small businesses that need to improve cash flow will also turn to factoring invoices. Again this varies by arrangement but a typical break down would be:

$100,000 Accounts Receivable

-$5,000 Factoring Fees (Averages 2-5%)

=$95,000 Received by Business Owner

(80% or $80,000 immediate advance with the balance less fees received when the invoice is paid in full by debtor).

Factoring vs Groupon

Now Groupon isn’t really factoring nor is it a loan. Plus factoring offers advances on business-to-business receivables and not business-to-consumer. But it is interesting to see that factoring fees look pretty attractive when compared to other options available to cash strapped business owners.

If you’d like to read the entire article on the daily deals subject (it was part of a series) you can find it at: http://techcrunch.com/2011/06/13/why-groupon-is-poised-for-collapse/

For more information on factoring fees and factoring companies read:

Accounts Receivable Factoring Examples

Comparing Factoring Companies

How I Run My One Person Factoring Business

Comments

  1. interesting insight.

Trackbacks

  1. […] Tracy Z wrote an interesting post on FactoringInvestor.com comparing and contrasting the cost Groupon vs. the cost of invoice factoring. […]

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