Another Way To Look At Factoring

See Also:
What is Factoring Receivables
Accounting for Factored Receivables
Journal Entries for Factored Receivables
Can Factoring Be Better Than a Bank Loan?
History of Factoring
How Factoring Can Make or Save Money
Factoring is Not for My Company
The What, When, and Where About Factoring

Another Way To Look At Factoring Explained

While talking to a prospect named Vicki, she told me, as I hear so often, “Factoring is just too expensive.” She continued by saying “The annual interest being charged for your services is in excess of 20%.”I let her finish, and told her that she is paying for more than just interest on the cost of money. In fact, we are actually providing you capital, not loaning you money. And, we are providing you with additional services, thus allowing you to increase your profits. In this article, we will look at the impact of factoring on profits – another way to look at factoring.
She said you have told me about the other services you provide, which are: performing daily and monthly collection activities; providing daily, weekly and monthly reports about account receivables aging and collection activity; assisting in establishing credit lines for our customers; and monitoring our customers’ financial conditions to alert us when they are in financial trouble. I just don’t understand how you are providing my company with capital, allowing my company to grow and increase our profits.
I told Vicki, capital is generated for her company by speeding up the cash received by her company for credit sales. By factoring, you will have faster access to the profits in your sales which create capital. She said that sounds great, but I would like you to further explain two things. How does my company factoring with you increase my profits? And, I want to know the return on my investment on the factoring cost I will be paying to your company.

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I asked Vicki a few more questions relating to her company’s growth opportunities and expenses she expects to incur with the growth. With her input here is the example I gave her:

Impact of Factoring on Profits

Let’s look at the impact of factoring on profits in Vicki’s example.

                      Before Factoring	    After Factoring

Revenues                $500,000                  $1,000,000

Cost of Services Sold   $325,000(65%)             $650,000(65%)

Gross Profit            $175,000(35%)             $350,000(35%)

Variable cost           $50,000(10%)              $100,000(10%)

Fixed Costs             $100,000                  $100,000

Cost of Factoring       None                      $25,000(2.5%)

Net Profit              $25,000(5%)               $125,000(12.5%)

I didn’t have to say anymore. Vicki explained my example to me by saying her profit after factoring increased both dollar-wise from $25,000 to $125,000 and percentage-wise from 5% to 12.5%. She stopped a minute, and then said, are you telling me that if I invest $25,000 in factoring, the net profit increases by $100,000 making my return on investment (R.O.I.) in factoring to be 400% (R.O.I. = (100,000/25,000) X 100% = 400%).
I said yes and Vicki then looked at me and said I understand what you are saying and I am interested in your program.
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