Receivable Financing

Receivable Financing; What do the options really cost? - Featured in The New York Enterprise - by Doris Cahill, President of DMC Accounting + Technology

For most businesses, offering credit to customers is not an option, it is the standard in their industries. Fortunately there are several options for financing your receivables, but the costs vary greatly. Below are a few different options. When you have figured out the true cost of financing your own receivables, you can consider adjusting the price of your goods to offset this cost.

Please note the following examples are for illustrative purposes. Each financing example makes different assumptions.

Financing Your Own Receivables

To determine if this is an option for you, establish the average days length of receivables you can tolerate. For example, if your average sales are $10,000 a day and it will take on average 60 days to collect this money, you need to plan for $600,000 to be perpetually tied up in your business (in other words, not accessible to pay bills). Tying up cash in outstanding accounts receivable will cost you the interest you would have earned on this money. As of May, short-term money market rates are 1% to 2% or about $9,000 per year on $600,000

. . . . . . . . . . . . . . .Cost per year: $9,000

Bank Financing

Banks can be competitive for good credit risks and prime rates are again near an all-time low (5% vs. 8.25% one year ago); however, banks typically require personal guarantees, and have reporting requirements. Using the example above, your loan amount would probably be closer to $350,000 because some receivables are collected up front or within 30 days. Your interest is then reduced (at the time of this article many banks are offering lines of credit for prime rate plus 2%, or about 7%), which places the cost of interest at $24,500 per year.

. . . . . . . . . . . . .Cost per year: $24,500

Credit Cards

A very popular financing alternative is to accept credit cards. When you accept credit cards, the cash from the sale, less the fees, is placed in your bank account in a matter of days. This method is costly, and fees can vary greatly but range from approximately 3% to 5%. These fees add up. If 50% of your sales are paid by credit card and the card company charges a 3% fee, using the example above, this will result in $54,000 per year.

. . . . . . . . . . . . .Cost per year: $54,000

Factoring

In a factoring transaction, your business “sells” its receivables to a factoring company and your customers make their payments directly to the factoring company. Factoring can provide the cash needed by companies that are in periods of rapid growth. Businesses sell receivables to the factoring company and receive an advance payment of approximately 60% to 80% of the invoice. The balance remains in a reserve. When the customers pay the invoices, the reserve is released and the factoring company deducts its fee, which can be from around 1% to more than 5%. If a business factors $300,000 per month in receivables and the fee is 3%, the cost is $9,000 each month.

. . . . . . . . . . . . . . Cost per year: $108,000

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