In order to consider invoice factoring as a potential tool for business financing you must be able to accurately quantify the profit margins on your income streams. Whenever interest is paid on money brought in from outside sources, like a factoring company, first determine whether you can afford the added expense. It is a good idea in any case to know exactly how much profit you derive from each sale you make. If it is a product oriented business it should be relatively easy. Deduct the cost of the product before sale from the sales price minus all the incidentals; shipping, taxes, commissions, business overhead etc. It is also a good idea to work with your accountant to get a fixed percentage of the sale that represents your “overhead costs†such as rent, utilities, office handling.
With a service oriented business it is only slightly more difficult, but if you treat an hourly wage as a product you can get a gauge on the costs involved with your work. Another benefit of going through this exercise is figuring out what it is you do that is the most profitable. Obviously you want to focus on activities or products that are have the most profit potential.
When using accounts receivable factoring, the discount rate for providing the cash flow to help you grow your business will be an added cost against the net profit. So knowing your profit margin will allow you to make the right decision when thinking about going to a factoring company for capital.