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Wednesday, May 14, 2014

How Do Factoring Companies Price Their Agreements?
There is a broad range in the factoring industry when it comes to pricing. The pricing set in the
factoring contract, known widely as the MPSA (Master Purchase and Sale Agreement), is dependent on a few aspects of the small business they are factoring.

Here is a general list of considerations the factor bases their pricing decision on:
Size of the company looking to factor.
Industry the company is in
Financial strength of the company
Special considerations
Purpose and use of funds 

Everyday I will right a short description of each consideration.

Size of the company looking to factor. 
This is perhaps the biggest influence on pricing from the factor’s perspective. Simply put, the smaller the factoring line (amount the company is looking to borrow), the higher the cost of factoring. Why? Factors need to see a worthwhile return on investment. Both the small business owner and the factor need to take on business that is profitable and worth the risk.
We recently spoke with a small business owner with nominal sales history that received their first purchase order for $20,000. The fee to cover the cost of this purchase order was $2,000 which is 10%. Looking at it from an outside perspective, you may think that is expensive. Let’s take a closer look. In this case, the cost of goods was $20,000 and the sale price (wholesale) was $28,000 or a 40% margin. The $8,000 profit would be reduced by $2,000 to cover the cost of financing. The companies first major sale would reduce their profit by $2,000, but it would give them the ability to fill the order and make the sale. Ideally, this will turn in to future business and larger orders. This concept and way of thinking was covered in my previous blog on opportunity cost.
As sales increase, the fee for financing will decrease. You have to take what you can get in the beginning until your business is on solid ground and the risk to lending to your business has subsided.

If your business could benefit from some additional capital to take advantage of sales opportunities, we would like to speak with you. Please contact us to discuss your needs 1-888-693-1439.

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