Banking vs. Factoring

Frequently Asked Questions About Banking Versus Factoring: At 3 points per month, That’s 36% per year (rates range from 1.59 to 3 points)
While it is tempting to annualize the numbers, it is truly an “apples-to-oranges” comparison. Banks loan money at an annualized interest rate, 12% per year for example.

We purchase your receivables at a discount. The products are different and there are other major inconsistencies when one tries to compare bank lending to factoring. The bank provides money only one time, the day that you receive the loan; we provide the money continuously. As an example, consider a bank loan for $100,000.00 at 12 percent. You receive the $100,000.00 just one time and then pay $1,000.00 interest per month and you still owe the bank $100,000.00.

Or, the bank could provide you with a Line of Credit that you use only when you need the money, but the bank charges you for that privilege and if you need to increase your Credit Line, you need to go through the qualifying process all over again. When you factor $100,000.00 each month for a year, you have the use of $1.2 million (12 x $100,000.00) over the year. Assuming a 3 point discount, the fees over the year will be 12 X $3,000.00 or $36,000.00, which is still only 3 percent of $1.2 million and at the end of the year, YOU HAVE NO DEBT!

I’m only making 3% profit, how can I pay you 3 points?

A company only making 3% net profit can do more business volume as a result of factoring, and the larger volume will result in a higher profit margin because fixed costs do not interfere with volume. The added business at a higher marginal profit leads to an increased overall profit margin. As the volume of your business increases, the cost of production decreases, so that profits increase.

Fixed costs (i.e. rent, electric, insurance, etc.) increase very little or not at all with volume. An increase in business will not affect rent. Electric bills may rise slightly. Worker’s compensation insurance may rise slightly. These costs do not increase as do direct production costs.

But I only get 80% of my money up front:
(Advances typically range from 70-90%)

Assuming an advance rate of 80% and a beginning of factoring in January. Factoring $100,000.00, you receive $80,000.00 of that money up front, with the remaining money making up the fee (3%) of $3,000.00 and the reserve (17%) of $17,000.00.

Now, in February you once again factor $100,000.00 and receive $80,000.00. However you also receive your January reserve of $17,000.00 (assuming that your customer pays you in 30 days). So, for February you actually receive 97% of your money, instead of 80%. In the second month going forward, you are basically receiving 97% of your cash flow.