Every now and then we get a business owner looking for the difference between APR (Annualized PERCENTAGE RATES) and Factoring Discount fees.
As an analyst these questions can still confuse me. Business owners juggle many different financial tasks and terms. However there is a huge difference between factoring discount fees and annualized percentage rates.
The difference is complicated:
– Annualized percentage rates are dependent on a businesses risk over the year.
-Factoring discounts fee’s lower the risk to net 90 terms at the most.
*keep in mind if you try and compare an annualized rate with a short term rate(factoring discount fee), you must ALSO compare a company that can qualify for a long term loan and one that cannot. Those two companies are not the same, neither is the cost of funds.
Above is the definition, and as you can see trying to compare the two is like saying ducks and eagles are the same because they both fly. I say this because if you attempt to multiple a 30-day invoice fee by 12 you will not get a accurate number of the annualized percentage rate.
For example: When a factoring company funds your 30-day invoice with net 90-day terms, your invoice will be repaid between 25-45 days on average. This means the risk of the outstanding invoice is only over a short period of time.
This short term reflects the risk your company brings into the equation. Factoring companies accept this risk and offer a factoring discount fee.
On the other hand a bank will make a loan that they expect will be paid over a year or more, because they make calculations whether or not your business will be better over a period of time. If banks see any risks that your business cannot pay back the loan, the you get no loan!
Factoring companies will give your business funds within 24 hours to 3 days. Their lending is dependent on the creditworthiness of your customers.
Hope this helped