Financial transactions have many different components, some of which are: fees or interest rate, collateral required, receivables eligibility requirements, type of guaranty, commitment period (how long is the contract for?), advance rate, maximum and minimum usage requirements, underwriting or application fees, break-up fees and other terms and conditions depending on how creative the lender / finance company wants to be. Each of the items listed above significantly affects the attractiveness of a proposal being presented. Yet, rates (interest or discount fees) seem to be the single item focused on when comparing one proposal to another. For example, it may seem somewhat strange that a 2.75% discount fee for thirty days can be more attractive than a discount fee of 1.75%. Something as simple as minimum monthly volume can affect this comparison significantly. Imagine the factor offering the lesser fee also requires the client to factor all of their receivables (say $400K per month) however the client only needs to factor half, $200K monthly. This puts the client in a position of having to factor double his/her required volume to get a 1% less expensive fee. In real numbers, in 30 days, $200K will cost $5,500 using a 2.75% discount fee. Looking at the 1.75% proposal, the overall cost will be $7,000 (.0175 X $400,000 X 30 days). As another illustration, imagine two purchase order finance scenarios one priced ½ point higher in fees than the other, for a 15 day period. However the higher priced lender will include an international finance facility allowing the borrower to purchase more products through international sellers where the lower priced proposal is for USA domestic only.
Some other items that are not quite as obvious can make the transaction more or less attractive. Factor #1 offers an 80% advance rate and factor #2 offers only 75%. PO lender #1 requires 30% of the product’s cost to be paid by the borrower while #2 only required 15%. Asset based lender #1 requires receivables eligibility at 90 days while #2 has 120 day eligibility. Factor #1 has a due diligence fee of $2,500 and his competitor has only $500.
How should all of this affect the broker out looking for financing transactions? Simply put, when confronted with a prospect “shopping” around for the best rates, never evaluate the prospect’s proposal until you have seen the entire picture. If the prospect is rate focused only, then it should be your responsibility to educate the prospect regarding other significant components making the proposal more or less attractive. You will be surprised how grateful that individual will be and perhaps you may win the transaction due to your knowledge and advice.