Alpha Company is a manufacturer of sporty sunglasses. They currently have outstanding invoices totaling $15,000. The majority of this money is due in a net 30 days. In one week’s time, Alpha needs to purchase a large quantity of plastic that will cost $12,000. However, if they pay the balance in full at the time of purchase they will receive a 15% discount. Currently they have $7,000 available to purchase raw materials. This would be a prime situation for Alpha to factor a portion of their account receivables. They could factor $5,000 worth of invoices and pay a fee of 3% (rates will vary, but 2% - 4% is average for a net 30 invoice) The total fee would then equal $150. The additional money will be used to purchase the shipment of plastic in full. The 15% discount would result in a savings of $1800. By factoring a portion of their account receivables Alpha was able to save a net total of $1650.

Factoring account receivables will not be right in every situation, however, at times it is a great way for a company to enjoy significant savings. At other times, it can provide an emergency source of money in a very timely manner. The key is to carefully analyze the circumstances before making a final decision.