Factor Pricing
Many people consider accounts receivable financing as an expensive funding option. Actually, it is more than funding, it is a significant servicing function that relieves a business of considerable administrative cost as well as reduces bad debt losses. Many times, the administrative savings alone justify the majority of the cost.
Pricing practices vary among different companies offering accounts receivable financing. A discount rate is usually quoted as an initial amount, and then a rate for subsequent time periods.
For example, a rate might be 4% for the first 30 days, and .12% for each day thereafter. The time period is from the date of funding to the date the invoice is collected. In this example, if the invoice were outstanding for 40 days, the rate would be 4%+(10 x .12)=5.2%.
Some factors quote the rate for subsequent periods as a 10 day or 15 day period. For example, 4% for 30 days, and 1.8% for each 15 days thereafter. The difference is that if the invoice is outstanding for 40 days, you will be charged 5.8% because additional time periods are calculated in 15 day increments. It is important to know exactly how rates are calculated.
It is also important to identify all the fees that will be charged. Sometimes, the discount rate represents a funding rate, and there is an additional servicing fee that may not be clear initially. Again, make sure you look at all the fees and calculate the true cost before you commit to any arrangement.
Your Liquid Capital professional can help you analyze your options so that you have a valid comparison to base your decision on.