Professional advice on factoring
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Would you like to improve your cash flow through factoring? There are numerous factoring companies on the internet, and your bank probably has its own factoring company too. But which company is best suited to your needs? And how can you ensure that you receive a competitively priced proposal that best meets your requirements? Nextfactor will guide you closely in your search for a good factoring company.
What is factoring?
Factoring is a financial service whereby your company transfers its outstanding invoices to a factoring company. Your company then receives a significant percentage of the invoice amount in the form of debtor financing. The factoring company takes responsibility for managing and collecting the invoices. Do you want to no longer be dependent on customers and how quickly they pay your invoices? Then factoring is the solution for you.
In addition, you can choose an option to insure against the risk of non-payment. This gives your company extra protection.
What are the advantages of factoring?
Opting for factoring offers many advantages for a company. It improves your company's liquidity, gives your customers more leeway, allows you to rely on credit ratings, reduces your own risks and saves you a lot of time. Enough reasons to consider factoring as a option for funding.
Verbeterde liquiditeit
The main advantage of factoring is that you immediately have more liquid assets at your disposal. Factoring companies usually pay out the financing within 24 hours. This allows you to grow faster, invest and/or pay your suppliers on time.
What's more, the financing automatically grows with your business. That is one of the major differences between factoring and bank loans, for example.
Flexibility for your customers
Your customers also benefit. Factoring allows you to offer customers longer payment terms. Most factoring companies accept payment terms of up to 90 days after the invoice date. This gives you a strong commercial advantage over your competitors.
Kredietbeoordeling
Factoring companies can also take over the risk of non-payment from you. They will then assess the creditworthiness of your customers and potential customers. This is also beneficial for you, as it gives you the certainty that you are working with creditworthy companies.
Reduced risk
Thanks to factoring, the risk of non-payment no longer falls on your company's shoulders. In short, you are protected against both bankruptcies and probable insolvency, where a debtor has not paid 90 days after the invoice due date. It offers you greater financial security and protects you against the risk of uncollectible invoices.
Time savings
Outsourcing your accounts receivable management frees up a lot of time. Time that you can put to good use for your core activities. Accounts receivable management can be taken over in whole or in part. Debt collection and late payments are also no longer your concern.
Maintaining customer relationships
Unpaid or late invoices put a customer relationship under severe pressure. By opting for factoring, you avoid this area of tension. After all, it is your partner who is chasing your customer.
How does factoring work?
Factoring involves a few steps. It starts with the transfer of your invoices, followed by their pre-financing. Then there is the collection process, settlement and remuneration.
Step 1: sale of invoices
Your company supplies goods or services to a customer and sends invoices with payment terms of 30 to 90 days. Why wait for them to pay their invoices (on time) when you could have the amount in your account tomorrow? By transferring your invoices to a factoring company, you get paid faster and therefore have financial resources available more quickly.
Step 2: pre-financing
After transferring your invoices, you will receive an advance payment. This is usually between 75% and 90% of the total invoice amount. However, some factoring companies go further and pay up to 100% immediately. The factoring company carries out the contractually agreed checks in advance. This advance payment is considered pre-financing and is often transferred to your account within 24 hours.
Step 3: collection process
The factoring company then takes over the entire accounts receivable management and collects the invoices as soon as they fall due. Who assumes the risk of non-payment, you or the factoring company, depends on the agreements made.
Step 4: settlement and remuneration
When your factoring company has received full payment from the customer, it pays the remaining amount to your company. This is the invoice amount minus the advance payment previously made and the factoring costs, which serve as remuneration for the service.
What types of factoring are there?
Factoring comes in various forms, but the core remains the same: a factoring company takes over your outstanding invoices and you immediately receive part of the invoice amount as an advance.
American-style factoring
This form of factoring is mainly offered by FinTech companies and is ideal for start-ups and SMEs. It offers financing of up to 98% of your outstanding invoices. You only pay a percentage of the turnover, usually between 1.8% and 5%, which includes the interest charge. The price therefore depends heavily on the payment term you grant your customers. In addition, you retain complete flexibility in selecting which invoices or debtors you want to include in the factoring programme. Invoices that are not eligible for financing, for example because they cannot be insured against non-payment, are simply not sold, so you do not pay factoring costs on invoices that have not been advanced.
Traditional factoring
Traditional factoring is often offered by bank-related factoring companies. It offers financing for 60% to 90% of your outstanding receivables. The factoring fee varies between 0.1% and 3% of turnover, but the financing is done via a current account, which means that in addition to the factoring fee, you also pay interest on the advanced amount. With this type, you are obliged to have all your invoices processed through the factor, unless they are paid in cash. On the other hand, it is not always necessary to include the risk of non-payment in the factoring formula. This form of factoring is particularly suitable for large companies and less so for SMEs and start-ups.
Another distinction relates to whether or not the debtor risk is assumed:
Without recourse factoring
In this case, the factoring company assumes the risk of non-payment. You must apply for a credit limit in advance for each debtor. Once this limit has been approved, your invoices are insured against non-payment by the factor, but only in the event of the debtor's insolvency and up to the amount of the credit limit granted. However, payment disputes are excluded from this insurance.
With recourse factoring
Here, the risk of non-payment remains with you, which means that in the event of non-payment, you will have to repay the financed amounts. If an invoice is overdue for too long, the financing on new invoices will be used for repayment. This can be mitigated by making the factoring company the beneficiary of your credit insurance contract. The factoring company will then only finance within the credit limits issued.
Factoring is also named according to the way in which your debtors are informed about the factoring:
Notified factoring
In this form, your debtors are informed that the invoices have been transferred to the factoring company. This is done by means of an assignment text on the invoice, stating that payments must be made exclusively to the factor. This is the legally correct procedure.
Confidential factoring
With confidential factoring, debtors are not informed about the transfer of the invoices. Debtor management then usually remains in the hands of the factoring customer. Although this method is less legally watertight, the bank account number on the invoice remains that of the factoring company.
How do you find the factoring company that suits you?
A factoring company should be a perfect match. How do you know which factoring company is right for you? You can count on our expertise for this. Nextfactor has years of experience in the factoring world. We make the comparison for you based on your specific needs.
Are you currently using factoring, but are you dissatisfied? There could be several reasons for this. It is important to identify them. Perhaps it is time to review your factoring agreement or explore the market.