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.

Square, for example, has a 2.75% fee for each transaction. [Square is the company that makes it possible to convert a cell phone, tablet or computer into a credit card processing device.]

Invoice Factoring is also a transaction based process. On a typical invoice factoring transaction, the service fee would be between 2% and 2.5% (depending on the specifics of the transaction). That’s less than taking payment by credit card.

Comparison to Bank Lending

The difference between factoring and bank lending is the difference between buying and renting. Bank lending is a rental fee. When you borrow from a bank (or access funds from a line of credit) you must pay those funds back in full, plus a little extra. That extra is the interest rate. This is similar to the fee you pay for renting a car. Once you’re done with the unit you must return it and pay for the privilege of usage. So it is with a bank loan. You have the privilege of using the bank’s money but must give it back when done and pay for the use.

In Invoice Factoring you have not borrowed money so you have nothing to pay back. You have sold an asset to the factoring company – an invoice that’s part of your company’s Accounts Receivable. (Typically there are multiple unpaid invoices in the A/R report at any one time.) That asset (the invoice) requires that your customer honor their obligation to pay for product and/or service. Thus the factoring company gets its money back when your customer honors that obligation.

Converting a discount rate (for example, the early payment discount noted above) to an interest rate is a unique calculation. It is not straight forward. Multiplying the discount rate by 12 months does not reflective the true cost of money because the “discount” is applied against revenue, not against a static borrowed amount. An interest rate, on the other hand, is applied against a borrowed amount.

For example, let’s assume $100,000 in invoices sold to the factoring company each month. Let’s further assume a discount rate of 2.5% on each invoice. [That, by the way, is on the high side.] In a year’s time $1,200,000 in future revenue would be sold to the factor. The cost of money would be $30,000 [2.5% of $100,000 = $2,500 x 12 = $30,000].

To calculate a comparative value for borrowed money you should take the interest rate of the lender’s offer and multiply it by $1,200,000. Here’s how that looks. The Lending Club (for example) recently advertised a rate “as low as” 5.9% per year interest. At 5.9%, on $1.2 million the cost of borrowed money would be $70,800 per year. If that revenue were factored the cost of money would be $30,000.


Understanding the difference between an interest rate and a discount rate requires looking at the financial transaction from a different point of view. “Cost of Money” is not a direct comparison. Using Cost of Money as the primary reason for a decision between the two financing models does not serve the business owner. The decision, as has been noted in other articles in this series, is better based on other considerations:

Can the business even qualify for bank lending?
Should the business refrain from adding debt load at this time?
Does borrowed money (or equity infusion) cause the owner to lose autonomy?

Financing, through either Invoice Factoring or Bank Lending, is a temporary situation. It is a support mechanism for business growth. As such, a business owner should assess his or her options based on the current business environment and choose the solution that will take them the farthest the fastest.

3 Effective Ways to Avoid Inheritance Conflicts

These issues come up mostly while talking with those who have gone through conflicts in their families during property division process in any of their estate settlements. In most of the cases there are references to the input from one of the members of family “once removed”, and not necessarily the ones who are the so called immediate heirs. These other people who are usually spouses or grandchildren don’t always have the similar emotional connection when compared to the ones who are immediate heirs. In most of the cases this may be unintentionally done. But, when children or spouses have things they want and they make demands, they often end up creating situations that finally result into conflicts.

Here are 3 ways that can help in avoiding such conflicts.

Understanding the Personality of other Heirs: It is very important that you try and understand what kind of people the other heirs who are also involved in the settlement issue are. Analyse their basic traits and find out the way to communicate with these heirs. This approach often resolves most complications even before they arise and clears off lot of misunderstandings. Personality difference is often the main cause behind a conflict concerning settlements. It will become more and more difficult to avoid conflict or maintain peace without understanding the differences.

Keep the Home Untouched before Formal Division: It is very important that you don’t claim your right on something that logically belongs to other heirs. It can also mess with their emotional sentiments and can further complicate the case for you. This is why it is important that the house remains untouched or undisturbed till a legal division is announced. An in-depth scrutiny of the property is important before there is any legal division and you can contribute to the process by not disturbing anything. Without the consent of other beneficiaries or heirs if you remove items from an estate or a home it is very much possible that the issue will get complicated. Very often we see people making this mistake of just going into a property and picking what they want without any consent with the concerned people and such actions are often justified by them through some facts or instances of the past. That being said, legally it will only complicate the case.

Only Beneficiaries or Immediate Heirs should be Part of the Property Division: Property division is a sensitive case and hence it should not be made a mass trial. Only immediate heirs or beneficiaries should become part of the process and other outside influences like children of heirs, grandchildren, in-laws, spouses etc should be kept away from the process. This is particularly more important at the beginning of the division process.

Credit Cards: Tips to Use Them Safely

There was a time when people roamed with a lot of cash in their pocket. This was because if you went shopping, the only choice was to pay by cash. But carrying cash always carried a safety threat as well. People could be robbed in the middle of the street and all that cash being accumulated by you is lost in a matter of seconds. Then came credit cards. For public that found it cumbersome to carry cash in the pocket, these cards were a boon. After all, this little innovation empowered them to buy all that they liked without bothering about the amount of cash in their wallet.

Today, credit cards are a common story. People have even equated the ownership of credit cards to be like a status symbol. However, none of this is true. We do agree that credit cards add convenience to your routine. But, at the same time, we would also recommend you to practice certain safety measures when you are using credit cards:

Always sign on the magnetic line. Most people forget to swipe their plastic card when they receive it. This results in the situation where they have been using the card for close to a decade without their signatures. Believe it or not, committing frauds using such unsigned cards is easy.

Swipe carefully: When you eat at a restaurant, don’t give the credit to your waiter for swiping it. Instead, ask for the machine to be brought on the table and swiped in front of you. With the new age portable machines, this is completely doable and minimizes the risk of being duped by the hotel staff. This rule is applicable in all transactions that you do with your credit cards.

Don’t reveal data to unknown people. If people call you and ask you for your plastic card number under the garb of making you participate in some other activity, please don’t reveal the details to them. Instead alert the legal authorities and let them handle the matter if you get such requests repeatedly.

The CVV number is secret. The CVV number is unique to your card and if it is revealed to a greater number of audience, the risk of being duped by the people also increases. Even when you are using the credit card for online shopping ensure that the transaction is facilitated by a secure and reliable payment gateway easily.

Mastering Your Credit Scores

Your credit score can impact nearly every aspect of your life. It can control whether you can obtain a mortgage, auto loan, or even a job. With this said, it is vital that you understand how to improve your credit score. Federal law requires that everyone have access to one free credit report per year. The reason this law exists is to allow individuals to verify that their credit reports are accurate. If there is inaccurate information listed on your report, by law you have the right to dispute the inaccuracies; the credit bureaus have 30 days to investigate and respond to the disputed items. If the creditor who put the disputed item on your credit report cannot provide proof that you are responsible for the debt, it should be removed. To obtain a copy of your free credit report you can call 877-322-8228, or mail a request to annual credit report request service, P.O. Box 105281, Atlanta, GA 30348-5281.

After you have received a copy of your free report and have reviewed it for any inaccuracies; you will need to dispute them directly with all three credit bureaus. The bureaus include TransUnion, Experian, Equifax. Once you have verified the information on your credit report is accurate, you can then use the following suggestions to help you increase your scores.

• Make Your Payments On-Time – The single most important thing you can do to improve your credit score is to pay your bills on time. If you have had late payments in the past because you simply forgot to make the payment, you may want to set up automatic payment arrangements to pay your bills. This will ensure that your bills are paid on time.

• Credit Card Balances – Credit cards (revolving credit) account for 30% of your score. To maximize your score, you should always keep your revolving card balances below 30% of their available limit.

• Credit Availability – Your scores are calculated based on your unused available credit, how much credit is open, and the length of your credit history. The length of your credit history accounts for 15% of your score. Based on this factor, it would be in your best interest to keep your revolving cards open instead of closing them, because closing old revolving cards would significantly shorten the length of your credit history. To keep a revolving card open, you should use the card at least once every six months. This will keep them from being inactivated.

• Lack of Credit – Unfortunately, if you have very little credit because you pay cash for everything; you probably also have a low credit score. Scores are only determined by the activity reported on your credit report; cash purchases have no bearing on your current score. Therefore, you want to have at least one installment loan and two revolving accounts open at all times. If you are having trouble getting credit, you could apply for a secured card from a local bank or credit union, or you could ask a relative or significant other if you could become an authorized user on one of their revolving cards. Becoming an authorized user will give you an instant payment history. Just make sure that the account you are going to become an authorized user on does not have late payments, or has a balance near the accounts limit.

• Judgments and Collections – If you have a judgment or collection that originated years ago, when you pay or satisfy the derogatory item it may temporarily lower your credit score. Keep this in mind if you plan to apply for credit. You may want to delay paying off old collections right before applying for a mortgage or auto loan.

There are many other ways to help increase a credit score; but keeping your payments on time, managing your debt properly, and having a reasonable amount of available credit are the easiest ways to ensure an acceptable score. Just remember, derogatory credit will immediately lower your scores, whereas making your payments on time and keeping your balances low may take as long as six months to recover from one negative item reported on your credit report.

Dollars and Sense: How Bankruptcy Lawyers Will Help You Out of Your Sticky Financial Situation

The word “bankruptcy” tends to strike fear into our hearts, especially if we’re going through financial trouble. But most people can’t see themselves ever filing for bankruptcy. The process seems like it’s made for failing businesses, government bodies, and other organizations. But personal bankruptcy laws exist to protect citizens who find themselves struggling with severe debt. If your finances drop into the red zone, taking the following steps will get you back on your feet:

Assess the Damage

Look closely at your financial portrait. If you owe large sums to multiple creditors, if collectors are calling your house, or if you find yourself paying for essentials with a credit card, you should start to consider remedying your situation. Begin by tallying up your financial assets – bank account balances, retirement funds, stocks and bonds, real estate, vehicles, and anything else of value. Once you have a grand total, compare it to the amount you owe. If your assets are worth less than your total debts, you should seriously consider filing for bankruptcy.

How Do I File?

You may voluntarily file for bankruptcy as soon as you determine it’s necessary. Alternatively, you may be compelled by your creditors to file. However your legal process originates, don’t try to navigate it by yourself. Get in touch with bankruptcy lawyers who will look closely at your circumstances and advise you on how to proceed. There are two different claims you can file, so an attorney will help you determine the legal route that best serves your interests.

Filing a Chapter 7 Claim

A Chapter 7 claim is fairly straightforward. If approved, this claim liquidates your assets and uses them to pay off a large chunk of your debt right away. In other words, it turns most of what you own into cash, and then distributes this cash among your creditors. It sounds scary, because you lose most of your holdings. But it’s not the end of the world – many people bounce back and rebuild their assets without all that debt holding them back. Especially with trusted bankruptcy lawyers on your side, this process can lead to a much-needed fresh start.

Filing a Chapter 13 Claim

Since they involve seizing most of the filer’s holdings, Chapter 7 claims aren’t great for people who own businesses, property, and other major assets. When you have large properties that you don’t want to lose, a Chapter 13 claim is the better choice. It allows people with consistent, predictable annual incomes to pay off debts over a three- to five-year grace period. Once a judge approves a Chapter 13 claim, creditors must stop contacting the debtor. The debtor then continues to work, paying off his or her debts as best they can during the grace period. No property or other assets are liquidated in this process.

Bankruptcy lawyers will tell you: filing isn’t so scary, and can drastically improve your situation. If you’re letting unpaid bills stack up and trying to ignore them, know that you can pursue legal options to relieve the stresses of debt and protect what you own.