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

I don’t think so. My opinion, if you need to factor you’re better off leasing on or driving for someone else.

 

For a solo owner operator, I agree, especially when he has to factor all of it.

A fleet of 15 - 20 trucks may have easily $300K - $500K in accounts receivables on recurring basis. At the same time they need, at the least - I guess - $300K - $400K of operating capital for the corresponding period.
Unless they have half a million of cash reserves all the time, they may run into cash flow difficulties easily in which case factoring may provide them with a usefull leverage.
Perhaps it is better for them to factor and utilize fast payments than having a pile of cash reserves too. For instance, they may buy more trucks and hire more drivers.

 

My company uses a factor. new clients are run thru them for credit approval.

Not everything gets sent there some old time customers that the factor wouldn't take, I'm not really sure why or who else..

Watching the president's wife focus collection efforts on the customers about to be 'un-funded' because they haven't paid the factor looks to be a problem but she stays on top of it.

I see them scan over today's invoices and know the money is in the bank soon instead of waiting for everyone to pay us in 30 or more days and I'm sure the company is hooked on that just like a junkie gets hooked on smack. I doubt we could survive the withdrawal.

 

If a fleet has to factor then they are either growing faster than they can afford or not managing their finances properly. There are many small fleets that don’t factor.
How could it be better to factor than to have a pile of cash?

 

factor in order to have cash now vs have no cash now and a pile o unpaid invoices. That's when it is better.

 

Instead of discussing factoring merits or their lack of, I was hoping for some mathematicians to show me what significantly different is between 104% of $5000 vs 2% of $ 260 000 in a span of one year, which was the bone of misunderstanding on the radio show.
To me it looks exactly the same...and has the same final effect.

 

So in 12 months of running and factoring loads you've only earned $5000?

Factor 5000 on Jan 1st @ 2%, $100
Factor 5000 on Feb 1st @ 2%, $100
In 12 months you've paid 1,200 on $60,000, still paid 2%.

You can not add up the cost percentile without adding up the income, that doesn't make sense mathematically, it's an unbalanced equation.
Yes, 12 months x 100 per month = 1200
But, 12 months x 5000 per month = 60000
60000 x 0.02 = 1200

Only way you would have paid a total of 24% is if you only factored one $5000 load for the year and paid $100 a month for 12 months on that one load. But that's not what you do.

Factor 5000 on Jan 1st, pay 100, get 4900
Factor 5000 on Feb 1st, pay 100, get 4900, have 9800
Factor 5000 on Mar 1st, pay 100, get 4900, have 14700
Factor 5000 on Apr 1st, pay 100, get 4900, have 19600

At the end of 12 months you've factored 60000, paid 1200, and have a final income of 58800

Unless I'm missing something, I don't have any plans to use factoring but I do enjoy math.

 

If you invest $100 every week for 30 years at a 2% return, it will be worth $213,696.31.

So you lose double that cause factoring
And I think 2% is low.

 

if you don't factor that's money losing value due to inflation and missed money you could have earned off of it in investments.
Other ways to look at it

 

The factoring fee is going to be somewhere between 2.5% and 3.5% depending on volume and how fast the receivables turn. Using 2% as an example is unrealistic. It's going to be closer to 3%.