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.

Investment Banking – 2 Main Types to Know About

Investment banks help private as well as public companies and organizations to gathers funds in both debt and equity capital markets. These banks were originally founded in order to raise capital and provide guidance on corporate financial strategies, such as acquisitions and mergers. Investment banks assume many different roles such as handing safety issues, providing institutional and public investors with brokerage services, providing corporate clients with financial advice, offering guidance on acquisition deals and mergers and more. These days, you can also find banks to have ventured into bridge financing, foreign currency exchange and private banking. Know about the two main types of investment banking companies India.

Basic bank for invest

This kind of bank tends to issue bonds and stocks to customers for a predetermined sum. Then the bank invests this sum which has been used by the client for buying bonds and stocks. Such types of investments vary across different banks. In the nations where this type of investment is permitted, investment banks come with networks of lending and financial organizations that they can derive profit from. Other banks also make investments in construction and property development. Customers with bonds and stocks would tend get payments from the amount of profit that is made on the sum that they have invested for a particular time period.

Both the investment bank and the client derive profits from the sum initially invested by the client. As these types of banks are completely familiar with the trade methods, they are often consulted about corporate investment activities like acquisitions and mergers by both big and small corporations and business houses.

Merchant bank for investing

This is the other kind of investment bank. Such kinds of banks participate in trade financing and provide business ventures with capita in the form of shares and not loans. These banks have their businesses based on how secure shares are. Such types of institutions only fund those business ventures which have only started in the world of business. Generally, startup merchant companies do not get any financing. Merchant banks can be regarded only as investment banks which are ready to invest some amount of the capital of the organization. The money is put in the form of an equity investment. The company acts like research and advisory firms in India into the transaction and offers advice. In case you want trade financing, you will like to get in touch with a merchant bank rather than an investment bank.

The primary function of these banks consists of offering financial services and advice to individuals as well as corporate houses. Such kinds of banks function like a type of intermediary between the consumers of the securities and the issuers of the capital. Various companies issue these kinds of securities in order to gather funds in the stock markets. Merchant banks offer better monetary solutions and options to the customers, and can assist customers to gather money via low-cost resources. These banks are able to revive the economic health of sick firms.

Tips On How To Spend Your Windfall Income

As individuals, especially workers we sometimes get windfall incomes in forms of bonuses, profit shares, etc. However, a lot of the time the temptation is to spend the money on acquiring a new car, new clothes, shoes, new phones, among other things. While acquiring these things in themselves is not a bad idea, it is wiser to use windfall incomes for things that will have long term positive impart on our lives especially because we do not have a full grabs of what tomorrow will bring.

For workers just starting off or in mid level careers, it is really important not to squander windfall incomes on non-essentials.

Many years ago during the mid 2000s, when the banking and telecommunication really became big industries, many banks and telecommunication companies paid bonuses and profit shares to their staff on a yearly basis. Most new staff and mid level staff squandered their money on buying cars, renting new apartments in high brow areas and changing their wardrobes almost every 3 months. Nite clubs were packed every Friday night with each person almost trying to out do the other in terms money spent.

Today, the story is different. The global economy is almost comatose. Banks are no longer giving huge bonuses, neither are telecommunication companies doing any better. The oil industry is in shambles. Every industry is operating lean.

Windfall incomes will not come all the time as the economic realities have now shown us. So if you are fortunate to get a bonus or profit share that amounts to something reasonable, here are a few tips on how to spend wisely:

1) Invest in real estate: As much as this sounds like really over flogged, it is a wise counsel. A businessman once said, “the only Estate that is Real is Real Estate”. Real estate is big business. There is a huge demand for rental apartments especially mini flats and 2 bedroom flats. There are several real estate companies offering instalments payment options for those interested in buying land. You can invest your windfall income in buying a half plot or full plot of land. I will advice you buy from a real estate company rather than directly from the community especially if you do not have funds for immediate development.

The simple reason is that the real estate company usually would have sorted out community settlement issues with the land owners and so you can be rest assured that you land is at least secure from land grabbers. Also, by buying from a real estate company, you will benefit from quick capital appreciation of your investment and rapid development of the locations since there will be several people also buying and developing their property in that location. Another advantage of investing in real estate is that after developing the property, you can put it up for rent if you do not wish to reside in that location and use the rental income to pay for your rent in your desired location.

2) Invest in a part-time business: If you already have a business that you can run part- time alongside your full-time job, you should invest your windfall income in that business. You can buy the needed equipments or register for a training programme that will increase your expertise in that business area. If you do not already have business idea, you may want to consider doing some research to see what part-time business to invest in.

3) Invest in education: You can invest your windfall income in further education that will boost your profile and give you a better chance at a higher paying role in your industry or another industry entirely. You an also invest in the education of your loved ones like your spouse, children or siblings (if you have this responsibility thrust on you)

4) Invest in Marriage: Yes! you read me right.

This is for those who believe in marriage. If you have a partner and your really desire to spend the rest of your life with the person, then invest your windfall income towards settling down. You can start making down payments for some critical items on your list. Marriage is an investment in your lifetime happiness.

5) Invest in Charitable Activities: Don’t spend all your windfall income on yourself. Life is about sharing and putting smiles on the faces of others. You can give a portion of your windfall income to a charitable organisation. Depending on your religious leaning, Christians are advised to give a tithe of this to their local churches. However, if you are not a religious person, do well to give to a cause that will help humanity.

A Quick Introduction To Behavioural Economics

The study of human behaviour, which has traditionally come under the umbrella of psychology, would seem to have little relationship with economics.

But, as we learn more about how the brain works through the dual disciplines of neuroscience and psychology, there is an increasing marriage with the field of economics, in order to better understand how people make financial decisions.

This has evolved considerably in recent years and is an emergent field that deserves a little introduction and explanation.

The traditional view of economics and financial decision-making

It is sometimes forgotten in economics that the field is meant to be about the behaviour of people when making financial decisions.

The traditional economist’s view is that the world is populated by unemotional, logical, decision makers, who always think rationally in drawing their conclusions. This view is underpinned by the understanding that human behaviour displays three key traits: unbounded rationality, unbounded willpower, and unbounded selfishness.

This has always flown in the face of the findings of cognitive and social psychologists, who questioned these assumptions as far back as the 1950s.

With the rise of behavioural neuroscience since the 1980s (especially Kahneman’s work) providing more insight into the workings of the brain, we are now more sure than ever about the role that emotion and bias plays in all decision-making: from simple day-to-day decisions like which dress to wear, through to larger decisions that may affect many people.

Overconfidence and optimism are two examples of behavioural traits that may lead to sub-optimal financial decision-making, and divert from the traditional model used. People have also been shown to make poor decisions, even when they know it’s not for the best, due to a lack of self-control.

So this is where behavioural economics has been able to step in and modify many of the beliefs of the traditional economic views.

What is behavioural economics – and how can it help?

Behavioral economics and behavioral finance study the effects of psychological, social, cognitive, and emotional factors on economic decisions.

This may apply to individuals or institutions, and involves looking at the consequences for market prices, dividends, and resource allocation.

Of the three traits of human behaviour included in the traditional model outlined above, unbounded rationality has received special focus, with new understandings in the field resulting from neuroscience.

Understanding better how people arrive at financial decisions can help in many areas: from personal finance to organisations shaping products and trying to get more customer sign-ups; and from the vagaries of stock market trading through to governments and how they formulate financial legislation.

Perhaps behavioural economics can, in future, help people to make better decisions to safeguard their financial futures; it may even have helped if more attention had been paid to it in the lead up to the Global Financial Crisis in 2008.

Is Your Money Really Yours? Hackers at Work!

Information is both beautiful and deadly! Today, the online marketplace runs on analytics and data but in the wrong hands, it could turn into the worst of disasters. According to a new study, cybercriminals are costing more than $575 billion every year and this could include your financial data! As the world is speeding into a world of internet and our future infrastructure depending on virtual intelligence, we are more in the risk of exposing our personal information. Cyber terrorists and hacktivists have become regular topics of discussion and the breaches they have been able to make are worth getting concerned of. It’s not just that our bank accounts are at risk but hackers could create a global crisis. We have already seen the power when hackers reveal how all of Manhattan’s traffic signals can be turned green or a US military drone be rerouted for an unidentified target!

Online crimes are estimated to be about 0.8% of the world’s total GDP and this isn’t a small number. In January 2016, hackers stole approximately $54.5 million from FACC’s (US Aerospace manufacturer) accounts. Given that such a large corporation was compromised, you can never be sure enough if your bank account is safe enough. The crisis becomes more serious when James Lewis from the CSIS says that “We don’t catch most cybercriminals and we don’t catch the most successful ones. So far, there has been impunity for these hackers”.

So, in what ways can the hacker rob you?

The case of frequent flyer miles

In December, 2015, more than 10,000 American users were hacked and cybercriminals were able to book free flights and other upgrades using the stolen perks! The hackers accessed the login information of users (frequent flyers) and flew several miles for free. While these customers got back their free miles in due time, the event reasons why we should be changing our login information (passwords) more frequently.

Even your health insurance!

Today, when medical costs are on the rise and we are depending on fast food for our daily living, it’s medical insurance that’s kept as a backup plan! However, you can be surprised that even this insurance can be hacked and you are actually paying the premiums for someone else. These identity thieves will obtain all medical benefits you have paid for and you will not know unless you are actually in need for emergency attention.

You can be apprehended for the crime you didn’t commit

In the worst case scenario, you could be getting a surprise visit from the police and be arrested for a crime you didn’t commit! While, these cases have been rare, identity thieves always have the option of making you the face of a crime. All of it is by using your personal details from different online sources. The lawyers will cost you a wholesome!

Chat override

Cases have happened in the past when hackers override a company’s chat dashboard and talk and make business with your clients and customers. In February 2015, HipChat announced that hackers stole encrypted passwords and other user details for 2% of their customers. After the event, several chat platforms switched to a two-factor authentication apart from asking their users to change their passwords frequently. Though, it doesn’t make your credentials completely immune to hacks, it does minimize the risks.

Your tax refunds

Generally, you would have filed your returns by 15th of April but the IRS won’t be checking it until late in June-July. This gives hackers a lot of window to steal your social security number and name and file a fake tax return and get the refund on their accounts. When you notice that your return application has been rejected, the money would be long gone.

Credit cards in your name

The most feared act of identity theft is when someone else is issued a credit card in your name. Using your bank login details, social security and email, criminals will be happily running debts in your name until your credit reaches it limit. It is therefore necessary that you review your credit reports more frequently and report transactions that you don’t recognize.

Social hacks

Most of us will not think twice when a friend in needs asks for some emergency money. However, there have been cases when you have actually transferred the money to a stranger’s account after he has hacked your friend’s social account and asked help via the chat box. Referred to as “social engineering”, these scammers will ride on your reputation and trick you into sending money.

Your data at ransom

This is among the scariest of scams that has been running on the internet. Hackers will be using a “Ransomware virus” and encrypt all your files on your personal PC. You won’t be able to retrieve these files until you transfer a substantial amount to the hacker’s account! Well, in this age of information, you don’t have a choice.

The key to maximum security lies in the basics. Change your passwords, keep your antivirus software updated, don’t visit suspicious links, don’t store confidential details on your email or phone and double-check whenever you are dealing with your financial details on the internet.

In 2015, half of all American citizens had their personal information (including banking details) exposed to cybercriminals. The internet was built for openness, speed but not for complete security. As we keep on adding more and more services to make our life more convenient, we are easily becoming the target for hackers. That being said, we don hint about switching back to the traditional means of doing transactions. Breaches have become regular and there is no way to completely avoid them. However, you can make things harder for the criminals and hope that they choose an easier alternative to earn money – someone else’s account! It is necessary that we begin to fully understand the scope of the problem and treat hacking as a nuisance. The thieves at the other end are smart. You need to be smarter.