Margin Awareness

For invoice factoring to be realistic as an ongoing working capital solution, you must know the effective profit margin for the work being done by your business. It is always important to know what activities in a business yield the best margins, but for accounts receivable financing to be of any help, the gross profit margin has to be greater than 20%. This does not mean to expect invoice factoring to cost this much, it is only a concern of the factoring company to insure that beyond the costs associated with factoring, the client will still be making a profit. The margin will allow for incidental problem accounts or extended payment terms. Unless the factoring company feels confident the client will still be making a healthy profit for continued uninterrupted operations, the factor will probably not approve the facility. So invoice factoring will consistently not work in very low margin – high volume sales situations.