Which method offers lower cost of funds (COF)?

Which method offers lower cost of funds (COF)?

• A. Broker
• B. Equity/Debt funding
• C. Securitization
• D. Discounting

Answer: (D)

Discounting provides funds by quickly converting a specific lease receivable into cash through a bank at a discount. The lender funds the transaction with short-term, secured financing against the receivable, so pricing is based on the bank’s short-term funding costs and the risk of the particular receivable. Because this is a simple, low-friction arrangement with minimal structure and no intermediary layers, there are fewer ongoing fees and no complex financing setup. Broker-based funding adds fees and margins to cover the broker’s service, increasing the overall cost of funds. Equity/debt funding involves issuing capital or taking on debt at broader market rates and can carry higher ongoing pricing and capital costs. Securitization bundles many receivables, creates a trust structure, requires ratings, servicing arrangements, and ongoing servicing and trustee costs, all of which add to the all-in cost. Therefore, discounting tends to yield the lowest overall cost of funds among these methods.

Discounting provides funds by quickly converting a specific lease receivable into cash through a bank at a discount. The lender funds the transaction with short-term, secured financing against the receivable, so pricing is based on the bank’s short-term funding costs and the risk of the particular receivable. Because this is a simple, low-friction arrangement with minimal structure and no intermediary layers, there are fewer ongoing fees and no complex financing setup.

Broker-based funding adds fees and margins to cover the broker’s service, increasing the overall cost of funds. Equity/debt funding involves issuing capital or taking on debt at broader market rates and can carry higher ongoing pricing and capital costs. Securitization bundles many receivables, creates a trust structure, requires ratings, servicing arrangements, and ongoing servicing and trustee costs, all of which add to the all-in cost.

Therefore, discounting tends to yield the lowest overall cost of funds among these methods.