Factoring Fees - APY or Cost of Doing Business?

If you offer your customers payment terms, waiting 30, 60 or 90 days to get paid can feel like forever, especially when you have expenses to pay. That’s where factoring can help. However, the true cost of factoring is often misunderstood especially when framed as an APY.

Payment Terms and Tight Margins

Consider the example of a beverage company that sells to large retail chains like Whole Foods or Kroger. They business ships $100,000 worth of product on Net 60 terms. That means they'll wait two months to get paid, but in the meantime need to replenish inventory, pay suppliers, and fund the next round of production.

To speed up cash flow, a factor can offer the following:

• Immediately provide funds of up 90% of the invoice amount

• The factor charges a monthly fee ie:1.5%

• Gross margin on the sale is 30% ($30,000)

A Better Lens: Factoring Fee as Cost Against Gross Margin

Sale Amount	Gross Margin	Factoring Fee	Net Margin After Factoring
$100,000	$30,000 (30%)	$3,000	$27,000 (27%)

Factoring fees are a cost of goods sold (COGS), just like freight, packaging, or marketing expenses. If the remaining margin supports your business model, then factoring is simply a tactical expense to unlock growth.

Factoring works especially well for businesses that:

• Have long payment terms (Net 30, 60, 90)

• Operate with healthy gross margins (20%+)

• Turn inventory quickly or need to scale fast

• Have a positive return expectation on the use of capital

Don’t Let APY Math Distract You

Framing the factoring fee as an annual interest rate is not an apples to apples comparison. AN APY is an annual fee while a factoring fee is based on the 30,60, or 90 cash conversion cycle.

Does Factoring Make Sense for Your Business?

If you’re considering factoring, Morewood Funding can optimize the funding process for rate, structure, and speed to close.

• Call: 917-561-7074

• Email: howard@morewoodfunding.com

• Online Form: https://www.morewoodfunding.com/