How to Factor Invoices on Small Margins

You probably have heard the many benefits of factoring receivables but may have thought it’s only viable for those companies with large profit margins. Well, you might be surprised to know that many companies with small profit margins are benefiting from factoring also.

For example let us say that you are only making a 3% profit on your product and the factoring fee is also 3%.Immediately one might think there is no room to work with but the next fundamental question is, “Could you increase your business (make it up in volume) if you had cash available through factoring?”

For some companies, particularly those with low margins, it is an opportunity to double volume. Consider this example:

Without Factoring

• Monthly Gross Sales – $100,000
• Cost of Goods Sold – $60,000 (60%)
• Gross Profit – $40,000 (40%)
• Fixed Expenses – $20,000
• Variable Expenses – $17,000 (17%)
• Monthly Net Profit – $3,000 (3%)

The above scenario has no factoring fee and yields a 3% profit at the end of the month. But remember, items like “fixed expenses” are constant regardless of volume. This means if by having cash available you can book more business the cost of production does not go up exponentially. Now consider the same example with factoring assuming you only double your business.

With Factoring

• Monthly Gross Sales – $200,000
• Cost of Goods Sold – $120,000 (60%)
• Gross Profit – $80,000 (40%)
• Fixed Expenses – $20,000
• Variable Expenses – $34,000 (17%)
• Factoring Fee – $6,000 (3%)
• Monthly Net Profit – $20,000 (10%)

In addition to increased profit there is also a benefit in relation to your “cost of goods.” Many companies with good cash flow can take advantage of discounts afforded by vendors; thereby lowering your cost of goods by as much as 3-7%. If, in the above example you were able to pay COD for your cost of goods, and get a discount of 5%, you would realize another $6,000 (3%) to the bottom line.

By increasing volume and ability, many companies with smaller profit margins are able to take advantage of large company strategies utilizing factoring. In the end this can result in significant improvements to the bottom line making factoring account receivables a viable option to companies with large or small profit margins!