How Accounts Receivable Factoring Can Increase Your Profits and ROI

September 21, 2016

Some intelligent business people reject factoring as a financing strategy because they are merely focused on the cost or fees. They extrapolate the monthly factoring fee over 12 months and feel they are paying an interest rate in the high teens or even thirties. They compare this rate to a bank loan rate and consider it too expensive to acquire funds. However, there are a couple of problems with this way of thinking. First, what happens if you have potential to grow faster and sell more products or services, but you've maxed out your bank loan capacity? What if you simply cannot qualify for a loan for some other reason? You could be missing out on not just an opportunity to invest in your business and generate more sales, but also the possibility of realizing more profits.

If you step back and look at the factoring fee as an investment of capital into your business, it may change your perspective on the so-called high interest rate. Since you are receiving your invoice payments faster, you can access and reinvest the profits from the sales back into your business earlier. This reinvestment can increase the dollar amount of your profits, as well as your net profit margin. Here's an example of how this might look in the real world. This example is roughly based on a typical staffing company that averages a net profit of 3.2% a year according to Inc. Magazine.  Your numbers may vary, but you can easily plug them in for an exact look at how factoring affects your business's bottom line.

XYZ Staffing Without Factoring

  • Revenues $500,000
  • Cost of Services Sold $350,000 (70%)
  • Gross Profit $150,000 (30%)
  • Variable Costs $50,000(10%)
  • Fixed Costs $85,000
  • Cost of Factoring $0
  • Net Profit $15,000 (3%)

XYZ Staffing With Factoring

  • Revenues $1,000,000
  • Cost of Services Sold $700,000 (70%)
  • Gross Profit $300,000 (30%)
  • Variable Costs $100,000 (10%)
  • Fixed Costs $85,000
  • Cost of Factoring $20,000 (2.0%)
  • Net Profit $95,000 (9.5%)

So what's the bottom line? By factoring your invoices, you've invested $20,000 (the cost of factoring) into your business and generated an additional $80,000 dollars in profit. Even better, you're ROI on the $20,000 invested is $80,000 or 400%. ((80,000/20,000) x 100 = 400%).

If you're interested in learning more about factoring and how it can increase your revenue and profits, contact us!


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