In case you missed it, I recently announced the launch of my new company, ei Funding, an Orlando based alternative finance company dedicated to providing small to medium sized businesses working capital needed to grow and ultimately become successful. I do this primarily through the funding methods of factoring, purchase order financing, and commission advances for realtors, agents, and brokers.
As a factoring company I am consistently asked the following two questions:
- How does it work?… and
- How much does it cost?
If I’m able to do this right, the answer I provide below should answer both of these questions at the same time. But first, before I get going, a couple of quick definitions.
Definition #1: Advance rate – the amount, expressed as a percentage of the total invoice value, that is advanced to the Client when purchasing the accounts receivable.
Definition #2: Discount rate – the interest rate, charged over the period the receivable is open or unpaid, and typically expressed as a monthly interest rate.
Typically, a Factor will advance between 75%-80% of the face value of an invoice (the “advance rate”). The cost for such an advance may vary between 2.00% – 3.0 % for the first 30 days (the “discount rate”). If the invoice is not paid within the first 30 days, typically a daily rate is charged, which is simply the monthly discount rate divided by 30 days and expressed as a per day percentage.
That said, here is a typical example to show you how it works, using 2.5% as the discount rate for a 30-day invoice and an Advance rate of 80%.
- ABC Company sells its products to XYZ Company and submits an invoice
- Invoice amount = $10,000
- ei Funding advances to ABC Company 80% or $8,000 (80% x $10,000) less the 2.5% fee (or $250) for total Advance amount of $7,750.00
- In 30 days when invoice is paid to us by XYZ Company, we pay the balance amount owed (called the ‘Reserve’) to ABC Company: $2,000
- Net receipts to ABC Company: $7,750.00 + $2,000.00 = $9,750.00; net costs $250 (or 2.5%)
The benefits to a company for using Factoring to meet its cash needs are many, some of which include funding rapidly, often the same day, flexibility of using it only with the Customers you choose, and the funding grows along with your company.
To learn more about the benefits of factoring please check out some of the other blogs on this website, or you may contact us directly at [email protected]. You can also find me on Twitter and LinkedIn.
Thank you and best wishes for success.