Annualise the return too
Multiplying the cost by four while ignoring the extra orders the released capital finances is half a calculation. Capital that comes back on shipment funds the next order at once.
Costs and benefits
You pay for the days the invoice is financed and for the protection on your buyer — and nothing for a credit line you do not use.
Costs and benefits
A discount, not an interest rate
The most common mistake in judging factoring is to take the discount on a 90-day invoice, multiply it by four and call it an annual interest rate. An annual rate is the price of capital lent for a period; the factoring discount is the price of turning one sale into cash on shipment, with the buyer's risk removed. Annualising it produces a number that describes nothing the exporter actually pays.
Nobody annualises being paid
A shop pays about 2% to receive card payments within two or three days — more than 200% a year if annualised. No one calls it usury: it is the cost of selling and being paid. So is the factoring discount.
It is not interest in your accounts
Under IFRS 9 a receivable sold without recourse leaves your balance sheet; the discount is a loss on its sale, in operating results — not interest expense, not a liability.
The alternative is not a 16% loan
For most Lebanese exporters that loan does not exist. The real alternatives are losing the order or financing an uninsured buyer from your own cash for 90 days.
Where the cost goes — illustrative example
USD 100,000 invoice, 90 days, 80% advance (USD 80,000). Indicative pricing; each transaction is quoted individually.
| Component | Amount |
|---|---|
| Factor's financing charge — 1% a month on the USD 80,000 advanced, 3 months | USD 2,400 |
| Credit insurance premium on the buyer | USD 500 |
| Factor's administration and collection | USD 600 |
| LTS brokerage | USD 650 |
| Total — 4.15% of the sale | USD 4,150 |
Annualise both sides
A 30-day production cycle, buyers paying at 90 days, a 30% gross margin. Without factoring, capital is locked for 120 days and turns three times a year: 3 × 30% = 90% gross on the capital employed. With factoring it comes back on shipment; even at six cycles a year, 6 × (30% − 4.15%) = 155%.
- Without factoring: 3 cycles × 30% margin = 90%
- With factoring: 6 cycles × (30% − 4.15%) = 155%
Factoring is not a loan
| Bank loan | Factoring | |
|---|---|---|
| Nature | A banking transaction: an obligation on your balance sheet | A commercial transaction: the factor buys your invoice at a discount |
| Balance sheet | Increases debt and the debt-to-equity ratio | Increases cash; no new debt |
| Cost | Interest paid periodically, principal repaid at the end of each period | A one-off discount, settled when your buyer pays the factor |
| Repayment | You repay the bank | You repay nothing: your buyer pays the factor |
| Security | Collateral and guarantees | The assignment of the insured invoice |
Profit and balance sheet, side by side
Illustrative example: the same USD 100,000 sale financed by a 16% loan or by factoring.
| Financed by a loan | Financed by factoring | |
|---|---|---|
| Financing cost in the year | USD 8,877 interest | USD 4,150 discount |
| Net income before tax | USD 18,623 | USD 23,350 |
| Short-term debt | USD 100,000 | None |
| Debt-to-equity ratio | 0.6 | 0.3 |
| Current ratio | 2.7 | 3.8 |
What it costs
Discount on the advance
A financing charge on the amount advanced, for the number of days until the buyer pays. A shorter payment term costs less.
Factoring commission
A fee on the invoice value for managing and collecting the receivable.
Credit insurance premium
The cost of covering the buyer’s risk, set by the insurer according to the buyer and its country.
File fee
A fee to LTS for preparing and following the transaction file.
Rates depend on the buyer, the country, the payment term and the volume. LTS gives you a full quotation before you commit.
How it compares
| Cash to the exporter | Buyer’s risk | Effect on your balance sheet | Appeal to the buyer | |
|---|---|---|---|---|
| Export factoring | On shipment (advance) | Insured | Receivable turned into cash; no new debt | High: buyer gets deferred terms |
| Open account, unfinanced | At maturity | Carried by the exporter | Receivable stays on the balance sheet | High |
| Letter of credit | On presentation of documents, if confirmed | Banks’ undertaking | Neutral; bank fees on both sides | Lower: costly and slow for the buyer |
| Cash in advance | Before shipment | None | Neutral | Low: many buyers refuse |
What you gain
- Working capital released on each shipment
- Competitive payment terms that win and keep foreign buyers
- Protection against a buyer’s default
- A lighter balance sheet: no new borrowing
- Collection handled by an experienced European factor