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Want to know more about factoring?
Finding the right factoring company for your company saves a lot of time and money in the long term. At corporate banking, we understand that every entrepreneur is unique. To help you in your quest, we've listed everything you need to know about factoring. from a to Z.
Is factoring right for me?
Factoring is a great solution for companies with constant cash flow needs with $ 30,000+ annual revenue.
You have to be willing (in most cases) to outsource credit management. An advantage for growing companies. But in return, you give away some control over your customers to the factor. The factoring company takes over the debtor contact and the collection of invoices.
Factoring is a successful and widely used method to help SMEs grow effectively. Not only does it promote cash flow, but it also frees up time and knowledge to be useful elsewhere in the business. The benefits that companies can realize with this extra manpower and more cash flow are relatively large for SMEs.
Factoring is particularly suitable for short-term cash flow solutions. It is also one of the 5 most popular forms of financing in the Netherlands.
Am I eligible for factoring?
It's a lot easier to qualify for factoring than a business credit .
Annual accounts, solvency, creditworthiness and the industry in which you operate can pose major obstacles to business credit. This is hardly bothering you with factoring.
Each factor has its own conditions, but roughly the following conditions apply to all factoring companies:
- The invoices that you want to be financed must be addressed to companies (B2B) or the government (B2G). Invoices to consumers are almost always excluded.
- Invoice must be based on completed work.
- The creditworthiness of your customers must be in order and the customer must be financially healthy
- The invoice has a payment term of a maximum of 90 days (barring exceptions)
- The company (or director / shareholder) has no serious arrears or tax liabilities
Some factoring companies have some additional conditions, such as:
- Minimum invoice amount
- Invoice must be based on completed work
- Customer must be established in the Netherlands
What does factoring cost
The costs of a factoring company translate into a percentage of the invoice amount that is withheld at payment.
The cost percentage depends on two factors:
- The fee factor .
They deduct a small percentage from every invoice that pays the factor. This way they cover the costs for their services. These costs are also referred to as the fee factor. Costs differ per factoring company, but are usually between 1% and 6%.
- The length of the factoring period .
With a longer payment term, the factor must provide financing for a longer period of time. The faster Your customer pays, the shorter the invoice will be open and the lower Your costs will be. The costs of an invoice with a payment term of 30 days will therefore always be cheaper than a 90 day term.
A practical example to clarify the factoring costs:
|Invoice amount||$ 10,000|
|Cost (2.5%)||$ 250|
|Advance payment (90%)||$ 9,000|
|Payout minus factor fee (7.5%)||$ 750|
|Total received||$ 9,750|
You factor an invoice of $ 10,000 with a payment term of 30 days. The factoring company charges a factor fee of 2.5% for this invoice.
As soon as you submit the invoice, the factoring company immediately pays 90% of the invoice amount. You will therefore receive $ 9,000 in your business account within 24 hours.
After 30 days, the debtor pays Your invoice to the factor. Once the factor receives payment, they pay out the remaining 10% of the invoice, minus their 2.5% factor fee.
The remaining 7.5% ($ 750) will be on your account within 24 hours after the debtor has paid the invoice.
With the factor fee of 2.5% (in this example), the factor covers all its services, including:
- Financing of $ 9,000 for a period of 30 days
- Credit management
- The debtor risk. In case of bankruptcy of the debtor, you have already received the advance of 90% from the factor. You do not have to repay that amount because the debtor risk has been taken over by the factor.
Extra costs to take into account
Over the past 5 to 10 years, competition has increased and a lot of innovation has been brought to the industry. As a result, many 'extra' costs have been eliminated. But in addition to the fee factor, also take into account the next one costs:
Older standard factor companies may charge additional costs in addition to the factor fee, including:
- Application Fee . When registering as a new factoring relation, costs may be charged for registering and opening an account.
- Surcharge for overdue payment . The payment term is used to determine the fee factor. However, it may happen that the debtor pays later than the final payment date. In that case, a fixed amount or step-by-step costs may be charged per additional period (week or month) until the invoice is paid.
- Bill costs . The factor may charge you to open a separate business account for you to which your debtors can pay the invoices.
- Minimum volume costs . If you cannot meet the set volume for agreements or minimum factoring volumes, the factor may charge a small 'fine'
- Creditworthiness checks . This is usually part of the service provided by a factor, but in some cases the factor will pass on these research costs to you.
Despite the fact that most factors only charge a factor fee, it is wise to inquire before entering into a contract:
- To an overview or breakdown of all costs
- Request quotes from different factoring companies before choosing one party
- Check your factor contract carefully for additional costs or obligations
In general, the younger and more innovative a factoring company is, the more transparent and simpler the costs are.
Room to negotiate with large volumes
Do you plan to factor more than $ 250,000 per year? Then there is a good chance that companies will offer a discount on the fee factor. Usually, the larger the factor volume, the more discount you can negotiate. Especially with larger factor amounts it is important to request at least 3 quotations from different companies.
Factoring or business loan, which is more advantageous?
When you compare the costs of factoring with a traditional business loan, factoring costs can seem high at first glance.
An average factor fee of 2.5% entails an annual percentage of 35%. That is considerably higher than the interest rate of traditional loans of 4% to 7% per year.
But the above comparison can be misleading, because the percentages of a traditional loan cannot be compared to very short-term invoice financing.
Situation 1: a company invoices $ 30,000 with a monthly factor fee of 2.0%. With an invoice term of 30 days, the costs are $ 600 per year. They factors for 2 years, the total cost is $ 1200.
Situation 2: The company borrows the same $ 30,000 through a traditional loan from a bank. The loan is annuity with a term of 2 years and 5% interest per year. The company pays a total of $ 1,587 in costs (interest) over the entire term of 5 years.
In both situations, the company has a cash flow of $ 30,000 available, while the cost of a traditional loan is 32% higher.
Conclusion: due to the very short terms of factoring, the factor fee cannot be compared with interest rates of long-term loans.
Companies typically use factoring to free up working capital for a relatively short period of time. Usually for a maximum period of 2 years.
When do you opt for American factoring and when for traditional factoring?
The two forms of factoring have some fundamental differences. When is american factoring right for you, and when is traditional factoring a better fit for your business? Let's compare the two forms of factoring with each other.
American factoring by invoice and traditional factoring are a good solution for SMB companies that want to experience controlled growth. In this way, companies use their existing cash flow to grow, without the risk of over-financing.
Traditional factoring with factoring contracts where a debtor or the entire turnover is financed with factoring is a godsend for start-ups and companies with explosive growth. Due to larger volumes, such companies can enter into factor contracts with minimum volumes, which means a lower factor fee is charged.
Get American factoring if:
- You don't want to make a weekly or monthly payment that you do with traditional factoring or business credit. You will receive an advance, and you will receive the remaining amount as soon as the debtor pays the invoice.
- You want to hire a financing partner with whom you have frequent contact. You work together to factor new factors, collect outstanding invoices and make payment decisions. The factor company is a professional party and can support you with credit management and cash flow optimization.
- The creditworthiness of your debtors is better than that of Your company. If Your company is not (yet) in a good financial position, you can still get started with American factoring.
Go for Traditional factoring if:
- You do not want an intervention between you and the debtor . In traditional factoring, the factor funds the invoice, but they don't collect the invoice. In addition, you remain responsible for debtor management and risk. Your debtors are therefore not aware of your invoice.
- Speed is important . Invoices do not have to be checked with the debtor, which means that you have access to the money more quickly. You can convert the entire debtor portfolio into cash flow within 24 hours of your application.
- The creditworthiness of your company is in order . Traditional factoring is actually a loan, which means that the financial situation of your company and the risk profile are decisive as to whether you qualify.
- You have more than $ 10,000 turnover per month . Currently the only traditional factoring provider is Floryn. To become a customer with them, you must have a demonstrable turnover of at least $ 10,000 per month.
What is Factoring?
Factoring is a financing method for companies that send B2B invoices. You get access to short-term working capital and cash flow by selling your invoices at a discount to a factoring company.
The factor pays 80 to 98% of the invoice immediately and then collects the invoice from Your customer. As soon as Your customer has paid the invoice, you will receive the remaining amount of the factor (minus factoring costs).
Factoring is the most popular financing method to free up cash flow
How factoring works in 6 steps
- With factoring, Your company makes a sale. You supply services or goods to another company and you make an invoice for this.
- You also submit the invoice to the factoring company.
- The factoring company checks and verifies the invoice with the debtor. To prevent fraud and inaccuracies, the factor asks the debtor:
- Whether they have received the invoice
- Whether they are satisfied with the products or services provided
- Whether they agree to pay the invoice through the factor
- The factoring company then immediately pays you about 80 percent of the invoice. Depending on the factor, that percentage can go up to 98%.
- The factor is waiting for the debtor's payment.
- The remaining outstanding amount is paid when the debtor pays the invoice. The factor fee is deducted from this. If the advance in step
The big advantage of factoring is that the creditworthiness of Your company is less important. Factoring companies mainly look at the creditworthiness of the debtors. They collect the money from them.
Do you have a fast-growing company, a start-up or are you not eligible for a bank loan due to poor creditworthiness? Then there is a good chance that your company is eligible for factoring. After all, it is not about Your creditworthiness, but that of Your customers.
Although factoring was previously widely used by large companies, the financing method is now increasingly common for SMEs.
What else do I have to pay attention to with factoring?
Costs, terms and conditions vary enormously between companies. Some providers focus on ZAP'ers, while others address the SME target group.
You can choose from more than 25+ factoring companies in the Netherlands. Besides the factor fee, what should you keep in mind if you want to compare factoring?
1. Traditional factoring or American factoring
Undoubtedly the biggest difference: two types of factoring are usually offered. Traditional factoring and American factoring split factoring companies into two groups. By choosing one of the two factoring methods, you already exclude many of the options.
Almost all factoring companies use American Factoring. That is the standard factoring method. With American Factoring you sell Your invoices to the factoring company. They also take over credit management and usually all additional risks, such as the risk of bankruptcy of the customer.
At American Factoring you will receive 80% to 98% of the invoice amount directly. You will receive the remaining amount (minus the factor fee) as soon as the debtor has paid the invoice. There is usually no minimum turnover that you have to meet.
Because the factoring company takes over credit management and bankruptcy risk in the American variant, this form of factoring is generally more expensive than traditional factoring.
Traditional Factoring provides financing to the amount of Your company's outstanding debtor portfolio. It is therefore a credit, where you yourself are still responsible for collecting the invoice. You also bear the debtor risk yourself.
You will receive a revolving credit based on Your submitted invoices. You pay back every invoice that you submit in 12 weekly installments .
Can't you borrow from the bank? Then this is usually possible via traditional factoring. You do not need a business plan or annual figures, which makes this form suitable for start-ups.
What else do you pay attention to with factoring compare?
2. How fast will you receive money
Most factoring companies pay invoices within 24 hours, but with a few factors that term can be up to 2 or 3 days.
Following the payout period, the amount of the payout may be important to you.
You will receive part of the invoice immediately within 24 hours (the advance percentage) and you will receive the remaining amount as soon as the debtor has paid the invoice.
The amount of the advance percentage differs per factor. This can vary from 80% to 98%.
Many growing companies that opt for factoring can already manage with 80%. But with a more acute and higher cash flow requirement, a higher advance percentage may be desirable. A higher advance percentage usually also entails a higher factor fee.
3. Contact between the factor and Your debtor
Many companies that are investigating the possibilities and factoring compare seem to be put off by the fact that the factor is taking over credit management. The idea of SME owners that debtors are approached several times by a factor they are not aware of in order to pay invoices is not entirely unjustified, but often exaggerated.
It is true that the factor will collect the invoice, but the degree of contact between the factor and Your debtor is negotiable.
Certain factoring companies require direct contact with Your Accounts receivable to perform credit checks, validate invoices and make payment arrangements. These situations mainly occur in industries where factoring is very common, such as the clothing industry.
Factoring companies discuss with you the extent to which the factor has direct contact with the debtor. In many cases this can be minimized (or even completely prevented).
Many large companies that receive invoices from SMEs are used to working with factoring companies on a daily basis. Many debtors find it no problem at all to pay invoices with the intervention of a factor.
Companies that do not want to tell their customers that they are factors can always opt for traditional factoring. There are several factoring companies in the Netherlands that offer traditional factoring. However, it is a less common way of factors. That way you keep sending the invoices to debtors yourself, while you can convert a large part of that invoice directly into cash flow.
Are you interested in the possibilities, providers and rates of traditional factoring? Fill in the form at the top of this page . Then we look at your options and we can find a suitable factoring partner for you, usually on better terms than you would immediately get.
4. Whether or not a debtor risk
An important characteristic in factoring compare is a takeover of the debtor risk.
In american factoring, debtor management is taken over. However, not all companies also take over the debtor risk.
What is debtor risk? In the event that Your debtor goes bankrupt or waits for an exceptionally long time before paying the invoice, the factoring company has the right to recover the invoice from Your. That can be a problem if you've already spent that money.
When the factor takes over the default risk, the risk of bankruptcy or non-payment falls to the factor. In case of bankruptcy of the debtor, you can keep the advance (80% to 98%) that you received from the factor.
If you only work with large and creditworthy customers, it can be more advantageous to bear the debtor risk yourself. If the factor bears the default risk, they will take out credit insurance. Those costs are passed on in the fee factor, so that you ultimately pay indirectly for the insurance costs.
5. Conclude a factoring contract or pay by invoice?
It makes a big difference whether you can sell invoices individually and choose what you want to factor, or whether you sell all invoices from a particular debtor through a factor contract.
In general, the companies prefer factor contracts. As a result, they only have to perform a credit check once and they have a guarantee of a minimum volume.
SMEs are often less enthusiastic about factor contracts. Although it entails lower rates, you sacrifice flexibility. During the growth phase of a business, many entrepreneurs want to maintain that flexibility, which increases the popularity of factoring for single invoices.
Innovative factoring companies (especially FinTechs) are closing this gap nicely with their automated solutions. For example, the creditworthiness check is fully automated for them, so that costs can remain low, even when factoring a few invoices.
The advantages and disadvantages of factoring
Factoring is an excellent method of freeing up cash flow to bridge a growth or capital intensive period. But with any form of financing, this method also has disadvantages.
- Low barrier to entry . The creditworthiness of Your debtors is decisive in the acceptance process. The financial position of your own company is less relevant. This makes it much easier to qualify for factoring than for bank credit.
- No collateral . Almost every form of credit requires collateral. No collateral or personal guarantee is expected in factoring.
- No guilt . Although factoring is a form of financing, you do not have to deal with repayments and interest.
- Short application process . You can have the first invoice invoiced within 2 to 7 working days.
- Flexible . A year, a few baskets or just one big bill. You can decide for yourself how long you need factoring.
- Customer contact . The degree of interaction is negotiable between the factor and Your debtor. But the complete prevention of any contact is usually not possible, because the factor has to verify invoices with the debtor.
- Costs . Like any form of financing, factoring involves costs. Not all providers are equally transparent about their costs. Always ask for a breakdown of the costs and check your contract for additional or hidden costs.
Which factoring companies can I request factoring from?
With a quick factoring comparison, you soon find out that the range is huge.
Traditional banks such as Grow, Sprout Bancorp and PIG BANK offer factoring services, however the acceptance criteria are quite strict and the fees expensive.
In the ever-growing range you will find many companies that are exclusively specialized in factoring, including more and more online 'fintech' companies.
- Grow bank
- Sprout Bancorp
- PIG BANK
- SVEA Finans
- Favture Satisfied
- o2 Factoring
- CS factoring
- Factoring partners and
- and credit services
- ABC finance
- Alfa commercial finance
- Credit pay
- Freelance factoring
- Trefi Finance
- BNP paribas
- Flow factoring
- Atlantis Financiers
FAQ: Frequently asked questions about factoring
Factoring is not the simplest financing method. Many SMEs that are relatively unfamiliar with financing have various uncertainties about factoring.
This article has aligned the basics and important aspects of factoring. Have you scanned the headlines quickly, or are there still uncertainties about factoring? Below we answer the most frequently asked questions from SME entrepreneurs.
Billing costs vary from 0.9% to 6% per invoice, depending on the factor fee and the length of the factoring period. A usual rate is around 2.5%. With a longer payment term, the factor must provide financing for a longer period of time. The faster Your customer pays, the shorter the invoice is open and the lower Your costs will be.
No. Which and how many invoices you sell depends on the agreement you conclude.
More and more factoring companies have the ability to factor individual invoices.
Quite common contract agreements with the 'standard' factor companies are factors of a minimum turnover or factors of a particular debtor.
That differs per factoring company. If a factor takes over the debtor risk from you, they are responsible for collecting the invoice.
Does the debtor risk remain with you? Then you will be responsible for collecting the invoice. Please note that in that case the invoice must still be transferred to the factor.
If the debtor risk is taken over by the factoring company, then you don't have to worry. The factor is then responsible for collecting the payment arrears. They will start a collection procedure in consultation with you.
In case the client fails to pay or goes bankrupt, the factor company has a credit risk to cover the loss. You can therefore keep the amount already received and incur no further costs or losses.
If the factor does not take over the debtor risk, they will recover the invoice amount from you. You then pay back the advance that you have received.
That depends on which method you use.
With American factoring, factoring companies usually have to verify the invoice with Your debtor. In addition, they take care of credit management. As a result, contact will be required between the factor and Your debtor. Many factor companies are flexible in adjusting the degree of contact to your wishes.
With traditional factoring, a credit line is provided based on outstanding invoices. The factoring company does not buy invoices from you, which means that in traditional factoring they do not come between you and the debtor. With this factoring method, Your customer does not know that you are using factoring
Factoring is a common financing method for SMEs and is widely used by growing companies. Moreover, this financing method is rare among SMEs with financial problems.
Factoring is particularly suitable for SMEs with customers in the medium and large segment. Such debtors work with factoring companies on a daily basis. They usually have no problem paying invoices to the factor instead of you.
Although most factoring companies include Your financial situation to some extent in their acceptance process, factoring is characteristic of the low entry requirements.
Companies that are not eligible for bank credit can usually contact factoring companies. The creditworthiness of your customers is decisive in factoring.
That's no problem. You then transfer the invoice amount to the factor company, or they settle it with a next one invoice.
The factor company will, in consultation with you, point out to the customer that future invoices must be sent to the factor company.