Factoring has taken off as a financing solution in recent years. The types of factoring have also grown enormously today. That makes choosing a suitable financing solution even more difficult, because which factoring type suits your customer best? In this blog we introduce the 4 most common shapes.
American Factoring is extremely suitable for SMEs & freelancers. As an entrepreneur, you sell your B2B invoices – immediately after delivery of your product or service – to a factoring company. The entrepreneur then immediately receives his money and the factoring company waits for payment from the client. In addition to this advance, some providers also take over the debtor management and credit risk, so that entrepreneurs are 100% assured of their money. The conditions are flexible: the contract can be easily terminated, there are no minimum turnover requirements and the debtors can be freely determined.
The invoice amount that is paid immediately varies per provider. There are factorers that do not use a deposit. This means that they immediately pay 100% of the invoice amount, minus the usual factoring costs that we explain below. Other factoring companies do use a deposit and pay 70-90% of the invoice amount immediately, minus the costs. The remaining percentage will only be paid as soon as the client has paid within the payment term. Does he pay later? Then in some cases a fine of 0.1% per day will be charged.
Traditional factoring (via the bank) is particularly interesting for large companies. As an entrepreneur, you pledge your entire debtor portfolio to a lender, usually the bank. It then finances a loan based on 70-90% of the value of the portfolio, less costs. The bank makes the remaining 10-30% available if the debtors pay within the agreed payment term. For entrepreneurs, therefore, the credit space increases as soon as invoices are added or have been paid. Some traditional factoring companies also take over debtor management and credit risk. The contract is long-term (2 to 3 years).
The bank maintains maximum concentration degrees per debtor. In that case, for example, a maximum of 25% of the turnover may consist of the income of one client. If that situation arises, you can advise your customer to opt for a combination of factoring types. For example by using American Factoring for this specific client. Sometimes the bank wants to exclude some debtors from the pledge in consultation.
Reverse Factoring works according to a reverse factoring technique. As an entrepreneur, you sell the invoices to be paid by you. This form is especially suitable for large companies that work with many small suppliers. Did the supplier provide products or services? Then you as an entrepreneur (read debtor) will receive an invoice from him. This is approved by the entrepreneur and a payment guarantee is issued. The invoices are then transferred to a factoring company. The latter pays the invoice to the supplier at an agreed time, before the due date. The entrepreneur pays the invoice and additional costs (see below) later to the factoring company.
Thanks to this factoring form, both parties have more working capital. Because suppliers get their invoices paid earlier and the entrepreneur keeps money in cash for longer. In addition, in some cases benefits can be negotiated with the supplier, such as more favorable conditions or discounts, because he gets his invoices paid earlier. Good to point out these opportunities in your advice!
Purchase guarantee with factoring
Unique in the market is a purchase guarantee with factoring via Svea Finans, the alternative to purchase financing. This offers a solution when the bank does not provide credit, suppliers do not issue supplier credit and an entrepreneur himself has insufficient resources to pre-finance (large) invoices. This form is suitable for wholesalers, manufacturers and SMEs who have to purchase themselves to prepare an order and deliver it before they can invoice.
In this case, the supplier is guaranteed that the factoring company will pay the purchase invoice to it. The supplier then delivers the required products to the entrepreneur, who prepares them and delivers them to the client. The factorer then pays the purchase invoice to the supplier. As an entrepreneur, you receive the difference between the sales and purchase invoice immediately after delivery. In this way, the entrepreneur can accept large orders and possibly finance the purchase himself in the future.
The costs of factoring differ per type. We list the costs per factoring type:
- American Factoring: 1-6% of the invoice amount. Administration costs, subscription costs and costs for credit checks are regularly added to this.
- Traditional Factoring: Various commissions, such as: closing, turnover, commitment and credit commission (interest). The costs added together are estimated to be around 1% of the value of the debtor portfolio (this only applies to a turnover of €10 million per year).
- Reverse factoring: 2-4% of the invoice amount. Often the factorer can offer a lower price because it runs a lower risk. After all, the invoices are approved in advance.
- Purchase guarantee with factoring: 2-5% of the invoice amount. The specific amount depends on the situation and the payment term of the client.
As an advisor or credit specialist, you can easily submit a digital application for factoring with multiple parties. An overview of the providers can be found in the Marketplace of Fyndoo Advise. Do you want to know whether factoring as a financing solution suits your customer? And what is the effect if he immediately disposes of his money? Then use the forecast module of Fyndoo Advise.
Not using Fyndoo Advise yet? Look here for more information or contact us!
This article was written in collaboration with Svea Finans.