Marketplace Sr. Editor Paddy Hirsch explains factoring.
I have always liked Paddy's explanations. In this case Paddy's description is not 100% accurate but is quite good. IN reality, most factoring companies actually buy the invoice in TWO installments rather than one:
Installment #1: Paid once services are rendered. Commonly 80% of face value of invoice ($3200)
Installment #2. Paid once the invoice is paid by end customer. The 2nd installment is the remainder 20% (or $800) less the actual factoring fee.
The fee will vary based on size, credit risk, etc.
Most 1st installment's tend to be in the range of 70% - 90%. However, 90% is usually reserved for staffing agencies and transportation companies.
is there anything similar to factoring for the retail side of this equation?
for example, once Nordstrom's got it's shoes and paid it's invoice, it wanted to get rid of some of the risk that the product won't sell.
all i can envision is some type of separate company that runs the register's at nordstrom's or something and pays nordstrom's for the shoes in advance of customers buying them. does this type of risk abatement exist for retailers ever?
I have to agree with some of the previous commentors: almost all of these videos are great (I've watched all of them and recommended to my readers: http://hype-free.blogspot.com/2009/08/educational-investment-resource.html ), but I'm not really seeing the point in this one: is the factoring company giving the money faster than 30 days? Even so, the the advantage is very small from what I can see, compared with a bank loan lets say, which would give an immediate access to a larger amount of cash...
PS. You might consider updating your comment form, since it doesn't offer any facilities for readers / viewers outside of the USA (which I'm one of) - for example you can't select "doesn't apply" or something similar from the "State" drop-down.
Very well explained, I learnt some thing new today.
I would like to thank Mr. Paddy for his great videos and detailed explanations. I am seeking a major in Finance and I really got great benefits and valued information about the market and the economy........And Again thank you , and I hope I can keep in touch with you.
Factoring is just an invoice advance? What kind of premium/interest is realistically charged? It doesn't appear from the example that "Sam" would be in bad shape at all (probably better off having $4K vs. $3.5K every month).
But Paddy, Sam is paying 12.5% interest on this "factor" loan. (500/4000) and he doesn't really get any new capital. So how can he expand?
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