Estimating the Cost of Factoring
Although there are numerous ways to quote factoring rates, they all boil down to dollars and cents. There are several elements to take into consideration in order to accurately estimate the cost of factoring.
As it costs less to factor quick-paying accounts and more to factor slow-paying accounts, it is best to be conservative when estimating the average days to pay (“DTP”) for your customers. When we ask an applicant the average time it takes its customers to pay, we often hear 35 to 45 days. In reality, most small business owners don’t track this statistic, so it is usually a best guess. If you give your customers extended credit terms, like Net 45 or Net 60 days, your average DTP is going to be higher. If you offer more “standard” credit terms, like Net 30 days, your average DTP will be lower.
The next step is to decide how much you wish to factor. Some factoring companies require you to factor all your accounts and invoices. We do not. You decide which accounts and invoices you wish to factor.
These are two of the most important variables factoring companies consider when pricing your contract: factoring volume and account quality (turnover). Generally speaking, a turnover of 8 times or more per year is considered satisfactory (assuming “standard” credit terms of Net 30 days), equating to 45 days DTP; a turnover of 9 times per year equates to 40 days DTP; a turnover of 12 times per year equates to 30 days DTP, and so on and so forth. The higher the accounts receivable turnover, the lower the factoring rates. The lower the accounts receivable turnover, the higher the factoring rates. Similarly, the higher the estimated monthly factoring volume, the lower the factoring rates, and vice versa.
An applicant expected to generate enough volume for the factoring company to collect $100,000 per month, combined with an accounts receivable turnover of 9 times per year, should qualify for rates around 2%, or about $2,000 per month.
Author: Tony Furman
Interstate Capital Corp.
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