Factoring math...let's not make it convoluted.

Or $6,000 worth of fuel, insurance, tires, truck repairs, etc. But you get my drift.

 

You’d have to compare the cost against the 30-60 days normally taken to pay. It’s high interest, for sure. But, if it means paying off a credit card sooner, for instance. I think it can be a good thing. For all practical purposes, the money owed by others, is something you only get, once you cease operations. Like money in the bank, I guess. More like an investment. Tying up your money. Sometimes I can do more by having the money now. I’m reminded of when fuel was high, rates were bad. Everyone was paying slow. It was a real problem. Needing money for fuel, to make more money, and not collecting it fast enough to cover the bill. One unexpected downtime, and it got out of hand real quick. Money was tight, while others owed me $23k. Checks were always in the mail.

 

I guess it would depend on your personal belief.
But what if you are forced to factor and every invoice is factored.
Suddenly a 70- 30 split becomes 68-32.
A company with a thousand trucks that factors themselves makes bank every week.
It's close to extortion to me. JMO

 

There are good reasons for some people to use a factoring service. Maybe they don't want to mess with the billing or trying to collect late payments, etc.
That is their choice, but they should know, and be willing to accept, what that factoring service actually cost them.
I don't like the term "time value of money". I refer to it as "lost opportunity cost". That mean you have lost the chance for that money you paid for factoring, to work for you.
For example, $100.00 invested every week at 10%( stock market average over the last 30 years) , would be worth $5463.58 at the end of 1 year.
Like I said earlier, factoring can make sense for SOME. It all depends on what you want to risk, or give up.

 

Ok, we HAVE to understand the math before we can rationally discuss the issue of factoring.

Let’s go with the original numbers posted, and let’s assume recourse factoring (taking credit risk out of the discussion).

assumptions:

invoices are issued on delivery, and paid in 30 days
Annual revenue is $200,000
Factor cost is 2%

in this scenario, the cost is indeed $4,000, but the average outstanding balance is $16,666. So the interest paid is just about 24%.

Not a cheap loan by any means, but not quite as usury as KR “high school drama queen” makes it out to be.

If you then add the whole no pay / bad credit to the discussion, where the factoring companies actively monitor shippers’ and brokers’ payment habits and keep you from getting stiffed on a load or two per year......... factoring plus credit risk management becomes not too bad an option.

 

KR got super frustrated with that guy. Almost like i thought we were going to hear him have a heart attack live on the radio.

He should put a calculator on his website; people could plug in the numbers and fiddle around so that it made sense to them.