Not at first sight.
If the interest charged by the banking system is compared directly with the discount rate of a ‘Factor’, then factoring will appear expensive as the interest charged by a factoring company is generally higher than that charged by the working capital bank. However, factoring does not end with availment of finance. A factor provides whole gamut of services like management of accounts receivables, following up with your buyers for overdue payment, providing you with MIS reports etc.
As compared to sales under LC terms, you can save the cost involved in opening an LC for your buyer and cost of LC drawing compliant documents for you. Availing factoring facility, by simply handing over of normal trade documents to the Factor and receiving money, also makes good economic sense.
The added benefits of factoring come from immediate availability of cash to the extent of 90% of invoice value (while banks fund generally to the extent of 70-75% of the invoice value), savings in the administration and collection cost of debts, savings arising out of reduction in collection period as a result of factor’s professional approach to invoice collection.