Every exporter who has turned down factoring has done the same calculation. The factor charges about 4% on a 90-day invoice. Four quarters in a year, so 4% × 4 = 16% a year. That is the price of a bank loan in a good year, and more than many companies are willing to pay. The exporter thanks us politely and walks away.
The calculation is wrong, and not by a small margin. An annual rate is the price of capital lent for a period. Factoring is the price of converting one sale into cash. Treating the second as the first produces a number that describes nothing the exporter actually pays, and it leads intelligent people to refuse a tool that would make them more profitable.
1. If you annualise the cost, annualise the return
The 16% calculation multiplies the cost by four and leaves everything else unchanged. That is half a calculation.
Take an exporter whose production and shipping cycle takes 30 days, selling to buyers who pay at 90 days, with a gross margin of 30%. Without factoring, every dollar of working capital is locked for 120 days, from purchase of materials to the buyer’s payment. The same capital turns three times a year and earns 3 × 30% = 90% gross on the capital employed.
With factoring, the capital comes back on shipment. The cycle falls from 120 days to 30. Even if orders allow only six cycles a year instead of the theoretical twelve, the same capital earns 6 × (30% − 4.15%) = 155% gross.
The 4.15% is paid once per order, out of the margin of that order. It buys the right to start the next order immediately. Annualising the cost without annualising the additional margins it releases is not prudence; it is an accounting error that makes the exporter poorer.
2. Nobody annualises the price of being paid
Every shop that accepts a payment card pays a fee of around 2% to receive its money within two or three days. Annualised, that is more than 200% a year. No retailer has ever refused card payments on the ground that 200% is usurious, because everybody understands that the fee is a cost of selling and being paid, not the price of a loan. The factoring discount is exactly that: the price of being paid on shipment instead of at 90 days, with the buyer’s risk removed.
Accounting standards say the same thing. Under IFRS 9, when a receivable is sold without recourse and its risks are transferred, it leaves the seller’s balance sheet; the discount is recorded as a loss on the sale of the receivable, within operating results. It is not interest expense, there is no liability, and no auditor would present it as an annual rate. An exporter who annualises the discount is applying to a sale the method that his own accounts reject.
3. The price includes what a loan never gives you
When an exporter compares the factoring discount with a loan rate, he is comparing two different products.
The loan gives money and nothing else. The exporter still carries the risk that the foreign buyer pays late or never pays. He still has to assess the buyer, follow up the invoice and chase the payment. He still pledges collateral and signs personal guarantees.
The factoring discount buys money and the transfer of the buyer’s credit risk to a AAA-rated credit insurer, and a professional assessment of the buyer before shipment, and the collection of the invoice abroad. The honest comparison is therefore not “factoring discount against loan interest”. It is “factoring discount against loan interest plus the cost of bad debts, credit insurance, collection and the time of your own finance team”. On that basis, factoring is rarely the expensive option.
4. The real alternative is not a 16% loan
The comparison with a 16% bank loan assumes that the loan is available. For most Lebanese exporters today it is not, at 16% or at any other rate. The real alternatives are three: refuse deferred terms and lose the order; grant the terms and finance the buyer from your own cash for 90 days, with his risk on your books; or factor the invoice.
Against the first, the comparison is the whole margin of the order, lost. Against the second, it is your own capital immobilised for a quarter and exposed to a buyer you cannot insure yourself. Against both, 4.15% of the sale is a modest price.
Exporters in mature markets know this and act on it: the cost of the payment term is a commercial cost, and it is priced into the offer. A buyer who asks for 90 days is asking for credit; the exporter who factors simply passes that credit to a specialist, and includes its cost in the price, as he includes freight and packaging.
5. The balance sheet tells the same story
In our simplified example, an exporter that finances the same sale with a USD 100,000 loan ends the period with short-term debt of USD 100,000, a debt-to-equity ratio of 0.6 and a current ratio of 2.7. The same exporter using factoring ends with no new debt, a debt-to-equity ratio of 0.3 and a current ratio of 3.8, and with more cash.
Profit follows: in the same illustration, net income before tax is about USD 18,600 with the loan and USD 23,350 with factoring. The loan’s interest runs for twelve months; the factoring cost stops when the buyer pays.
A lender, an investor or a future buyer of the company will read these two balance sheets very differently. Factoring improves exactly the ratios a bank would look at if a bank were lending.
6. What to measure instead
- The cost as a percentage of the sale, here 4.15%, set against the gross margin of the order.
- The return on working capital with and without factoring: how many more orders the same capital can finance when it comes back on shipment.
- The cost of the real alternative: a lost order, or your own capital tied up for 90 days with an uninsured buyer.
- The effect on the balance sheet: no new debt, no collateral, better ratios.
Conclusion
The annualised discount answers a question nobody is asking: what would this cost if it were a one-year loan? It is not a loan, it does not last a year, and it is not accounted for as one. The questions that matter are how much margin each order earns, how often the same capital can earn it, and what happens to the order if the buyer cannot have his payment terms. Asked that way, the 16% disappears, and so does the reason to refuse.
The figures are an illustrative example based on LTS’s indicative pricing for a USD 100,000 invoice at 90 days with an 80% advance. Actual pricing depends on the buyer, its country, the payment term and volumes, and is quoted for each transaction. The turnover example assumes a 30-day production cycle and a 30% gross margin.