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

Discussion in 'Ask An Owner Operator' started by TallJoe, Aug 17, 2020.

  1. TallJoe

    TallJoe Road Train Member

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    For all practical purposes, an average Joe does not need to hear about mathematical nuances that factoring involves.
    All he needs to know is that when he factors all his invoices worth $200 000 at 3%, he will forfeit $ 6000 to a factoring company, which is a first rate resort vacation in Cancun, Mexico for the family of 3. I think 10 nights all inclusive.
     
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  3. TallJoe

    TallJoe Road Train Member

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    In other words, factoring should be better discussed in terms of how much money you give away to a factoring company per factored revenue vs. what percentage gets accumulated in a given time when you factor, which is only relevant as an arithmetical phenomenon... am I correct or no?
     
  4. Scooter Jones

    Scooter Jones Road Train Member

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

    Rideandrepair Road Train Member

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    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.
     
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  6. TallJoe

    TallJoe Road Train Member

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    It is all correct but the point I was making though was that many factoring opponents were implying that if you factor that means you are getting screwed like you could no more because they are charging you loan shark interests. They put 2% or even 5% on your invoice in exchange of your not waiting 30-60 days for it be paid in full. If you factor only one invoice of $5000.00 at 2%, you'll never going to pay them another $5000 by the end of the year - you will pay them $100 on the day you factor and that's the end of it. If you decide to factor $5000 every week on recurring basis then it is not that you factor $5000 at 100% but 2% each time you do it or 2% from $260 000 for the whole year. Saying $5000 at 100% per year is an attempt to come up with another Zeno's paradox. Half true, half false...deceptive.
     
    Last edited: Aug 17, 2020
  7. REALITY098765

    REALITY098765 Road Train Member

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    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
     
  8. Lyle H

    Lyle H Road Train Member

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    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.
     
  9. Accidental Trucker

    Accidental Trucker Road Train Member

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    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.
     
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  10. Konkapot

    Konkapot Bobtail Member

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    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.
     
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  11. TallJoe

    TallJoe Road Train Member

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    He could not explain it and I could not follow him either.
    And If you can't quite explain it then you don't quite understand it ... hell I just made it up LOL
    I think KR wanted him to realize that when he factors he needs to "sort of" initially borrow $5000 from a factoring company and then return it after a week with interests, so unless he stops doing it week after week that $5000 will accumulate 102% interests or $5200 after a year.


    The guy, I mean the caller, was absolutely correct about knowing what the factoring would cost him per invoice. For that he did not need any calculators. KR was confusing him with his convoluted view at it.

    For the caller that view is of no use. All he needs to know is that when he factors 260K worth of invoices in the span of 12 months he will end up paying $5 200 to the factoring company in absolute terms.


    I think much easier way of looking at it is that a factoring company is buying the caller's invoices worth $5000.00 for $4900.00 ( 2% less). Then he can continue selling them or decides not to sell them any more.
     
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