Calculating cycles, factoring receivables
In this case, the monthly effective cost for borrowing would be 2.2%. Calculated by multiplying the discount percentage (2%) by the average collection time (34 days) By factoring all receivables immediately at a 2% discount, your firm would be able to access funds sooner than if you were to wait for payment—in turn allowing for quicker investments or other purchases that could benefit your bottom line.
Although this may sound high-priced, it is actually a much more affordable form of capital than loans from traditional banks and other lenders. Additional benefits include the fact that no fees are charged if accounts are maintained current. This helps reduce financial costs. In conclusion, while there may be more suitable solutions depending on one’s individual needs; utilizing an immediate discount on receivables can offer an attractive solution if cash flow needs are pressing and default risk is low.