Harborline Components: Funding a Supplier Discount Without Factoring the Largest Customer
Harborline Components is a 42-employee contract manufacturer with $6.8 million in annual sales. Its largest customer, which represents 31% of revenue, has quietly stretched payment from 30 to 58 days over two quarters, and Days Sales Outstanding has risen from 41 to 63. The company holds $190,000 drawn on a $250,000 bank line of credit at 9.5% APR and $74,000 in cash. A key resin supplier offers terms of 2/10 net 45 on roughly $40,000 of monthly purchases; Harborline currently pays on day 45 to conserve cash. The controller proposes factoring the largest customer's $310,000 in receivables at a 2.5% flat fee, settled in 45 days. The owner wants to know whether to factor, take the supplier discount, or do both, and whether to confront the customer directly. Fourth-quarter resin prices are expected to rise 6%.
1. Compare the annualized cost of forgoing the 2/10 net 45 discount with the annualized cost of factoring, showing your calculations. What does the comparison imply about which source of funds is cheapest?
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Forgoing the discount means paying $40,000 on day 45 instead of $39,200 on day 10: $800 to hold $39,200 for 35 extra days. Annualized simply, (2/98) x (365/35) = 21.3%; compounded, (1.0204)^(365/35) - 1 = 23.5%. Factoring costs 2.5% for 45 days, which annualizes to 2.5% x (365/45) = 20.3% simple, or about 22.2% effective on the $310,000, a fee of $7,750.
The two options cost roughly 20-23% annualized, and both are far above the 9.5% bank line. That is the decisive fact: the cheapest marginal dollar in the business is undrawn line capacity, not either trade-finance product.
The comparison also shows the two are not substitutes. Factoring monetizes receivables already earned; the discount affects new purchases. Taking one month's discount requires $39,200 for 35 days, about $357 of interest at 9.5%, against an $800 discount, a net gain near $443 per month or roughly $5,300 a year. Headroom on the line is $60,000, so this fits, though it will not fit alongside much else.
2. Recommend a course of action and explain its effect on the cash conversion cycle and on the relationship with the 31% customer.
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Recommendation: draw on the line to take 2/10 net 45, decline the factoring offer for now, and raise the payment terms with the customer in parallel.
The discount yields about $5,300 a year at low risk. Factoring costs $7,750 per cycle at a rate above the line, and if it is done on a notification basis it tells a customer representing nearly a third of revenue that its account has been sold. That is a distress signal, and it invites further stretching or a credit review at exactly the wrong moment. The 6% resin increase raises the value of locking in discount terms and argues against depending on supplier forbearance.
Cash conversion cycle: with DSO of 63, inventory days near 38, and payables at 10 days under the discount, the cycle is about 91 days. Paying on day 45 makes the arithmetic look better at 56 days, but that 35-day stretch is the most expensive financing in the building at over 21% annualized.
Sequence: take the discount this month within line capacity; propose 1/15 net 45 or a supply-chain finance program to the large customer rather than issuing an accusation; set a concentration limit and develop two mid-size accounts; and if the customer refuses, price the terms into future quotes. Factoring becomes a fallback only if the line is exhausted and DSO is still climbing.