An interest component is also charged on the cash amount advanced. This is added to the fixed discount for a total financing fee. The interest component is usually pegged to the published prime rate, LIBOR (London Interbank Offered Rate) rate, or the 10-year U.S. Treasury Rate, which acts as a base rate of interest. A margin for profit is then added to the base rate of interest, which represents the total interest component charged. An example can be seen in the chart on the previous page for a $100,000 invoice, advanced at 80%, with a flat factoring discount of 3% and 12% fixed simple interest rate for each 10-day period.
Using the example chart of a flat-fee plus interest method, you can see that a client’s $100,000 invoice, advanced at an 80% rate ($80,000) and outstanding for 60-days would have been charged a 3% flat factoring fee or $3,000, and would have accrued an interest charge of $1,578 for a total finance fee of $4,578.
Generally speaking, those factors using a window-style structure will have slightly lower fees for invoices paid in less than 30 days. Flat-fee plus interest factors will be slightly less expensive for clients with invoices paid in more than 30 days. In the real world, with the broad diversity of fee structures, hybrids, and combinations found throughout the industry, a factoring fee structure needs to be examined closely to determine if one has a competitive advantage over another for a particular client. Additionally, most factors are reasonably flexible with their fee structures and will accommodate some modifications necessary to suit a particular “fee-sensitive” client.
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