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

No different than borrowing 5000 from your bank, when the customer pays you, you pay the bank. You don't like the word "borrow" so you discount the same amount of money over and over again, when in fact you only need it one time.

 

I see both sides of the argument have validity.
I have to say that for practical purposes one cannot reject the factoring as a complete scam that thrives on ignorant truckers who don't see math.
If we assume that 3-5% per invoice is the same as borrowing money for the same period which repeats on perpetual basis without end in sight then indeed you can say that all you need in order to avoid the factoring cost is enough money to be able to wait 30-60 days.

Practically though, factoring cost translates to about 5-10k per year for an individual owner operator. So as long as they know then there is no need to explain any better.

On the other hand, what @wichris has said is very significant for a prospective factoring investor. If you have tons of cash laying around then what would be better from putting it into factoring business? For every $100 000 factored at 3% with a cycle of one month (as most brokers pay within 30 days) the are getting return of $36 000 per year.
JEEZ... not bad!
But you see, it does mean that a trucker Joe loses all that money when he factors. It is them, factoring outfits, who win that money from many truckers Joes.

 

If a 15 to 20 truck fleet doesn’t have 400 to 500k cash on hand. They are in trouble and don’t even know it. The argument that a 20 truck fleet is any different then a one truck op is silly. A 20 truck fleet will just fall even harder. Mistakes compound and happen quicker.

 

I enjoy Fuel Mileage Friday vs. Free For All Friday myself lol

 

2% of the gross is what % of the REAL net.
That"s right out of your pocket.
2% of the gross is not a realistic number.

 

Still has the same resault.
You have 0.
You borrow 5k, you have 5k
Customer pays you 5k, you have 10k
You return 5k, you now have 5k.

Do it monthly for 12 months and at the end of the year you have $60k minus the 2% fees totaling $1200.
Not 5k which you paid monthly on for a total of 24% fees at 2% per month like you stated in your initial example, no matter how you look at it, your example completely ignores the additional money being added to the equation.

 

Are you only grossing 5k a month?

 

Look, when you're making the kind of money @TallJoe is, paying 2% to 3% for your money within a couple of days is like a ham sandwich relative to the rates he's fetching these days

I wish a math whizz would use the APR method of calculation.

 

But if you actually used APR it blows your whole theory of how cheap factoring is. They don't try to use a LOC because, well they don't have the credit to qualify. They don't use cash because, well they don't have any.

 

My theory that factoring is cheap? Where did I say that?