Comparing Invoice Factoring to Bank Lending

When discussing invoice factoring with referral partners and prospective customers they frequently attempt to compare the cost of money through factoring to the cost of money through bank lending. This is a comparison that is not easy to make because the processes are so very different.

The following is a good way to explain the difference.

Comparison to Early Payment Discount

The most direct comparison for Invoice Factoring is the early payment discount offered by many companies to their customers. Traditional early payment terms are 2/10 Net 30. This means that the customer can take 2% off the face value of the invoice if they remit payment within 10 days of receipt of invoice. Otherwise they must pay the full price in 30 days.

This is precisely what Invoice Factoring does without offering the end customer the option to take the discount. There are advantages to taking this approach. One is that end customer does not get accustomed to the idea of a discount. Therefore, when a business no longer needs to factor its invoices that 2% goes directly to the bottom line.

Here's another reason that factoring makes good sense. Some companies will insist on taking an offered 2% discount and pay in 30 days anyway. This completely destroys the purpose of offering the discount.

Factoring eliminates these two negative ramifications.

Comparison to Accepting Credit Card Payment

At its most basic level, invoice factoring is a means by which a business owner collects immediate payment from customers who either cannot or would rather not pay with cash. In the world of consumer-based businesses (and some commercial transactions) this is done by accepting payment by credit card. The Merchant Processing Fees charged for credit card payment range from 1.75% to 4% of transaction value. The type of card, bank, volume, etc., impact the actual transaction fee.

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