What is factoring?
Factoring provides you with an advance on invoices that your customers have not yet paid. In this article we share some insight with you into the advantages and disadvantages of factoring, the distinction between American factoring and the traditional variant, and the difference between factoring and collecting invoices using the IOS procedure.
The big advantage of factoring
Factoring or advance payments give you more working capital. The factoring company immediately pays you the money that you would normally receive from your client in 30, 60, or 90 days. Factoring is, therefore, an alternative form of financing.
How does it work?
The basic principle behind factoring is quite simple. In essence, you sell your invoices to a third party who then pursues the money from the creditors.
Exactly how this 'sale' of invoices works varies depending on the agreements and the chosen factoring form. Each variant has its pros and cons. But, in general, the less risk you want to take, the more it will cost you.
With factoring, you usually get the money you have earned in two instalments. Usually, you immediately receive 80 to 90% of the outstanding amount into your account. You will receive the second instalment, minus the factoring costs, when your client has paid. Exactly how the payments are arranged and what factoring costs you pay will depend on your contract.
Which invoices are eligible for factoring?
By means of factoring or advance payment, you receive an advance on what your customers owe you. So, it goes without saying that you can only apply it to invoices with a due date that is still in the future. This is an essential difference with the operation of Unpaid, which collects on invoices that have expired.
In addition, the factor company imposes a number of conditions, so it does not accept all invoices from all customers.
- After an audit of your client base, the company may exclude clients if they consider their solvency to be too low, or the chance of collection seems to be too small.
- In the contract, the company can stipulate that it only intervenes on invoices with a fixed minimum amount. At Unpaid, we do not apply such conditions. On the contrary, even for relatively small invoice amounts, it pays to use Unpaid.
2 x 2 types of factoring
Would you like to be paid immediately for each invoice, or do you only use factoring for some customers or invoices? That is the first choice you have to make.
Traditional factoring involves outsourcing your entire accounts receivable portfolio. You draw up your invoices, and from then on everything is in the hands of the factoring company. It pays you the advance and goes after your money. You have little control over the way this is done.
American factoring or spot factoring
Here, you choose which invoices you want to use factoring or advance payment for, although the factoring company may refuse invoices. This method costs more than traditional factoring.
Whether you go for traditional factoring or American factoring, you will also have to decide how much risk you are prepared to take, and how much it may cost.
With resource factoring, the risk of non-payment remains with you. In other words, the factoring company will pay your invoice in advance, but you will have to pay back the advance if your client eventually fails to pay or goes bankrupt. Because you retain the greatest risk, resource factoring is the cheapest option.
With non-resource factoring, you do not run any risk in the event of bankruptcy. Once you have received the advance payment, it remains yours. The factoring company cannot reclaim it.
The costs of factoring
Of course, there is a price tag attached to advance payments. The actual costs depend on the contract you have with the factoring company. Traditionally, the price contains three elements:
- A fee for the service
- The factoring rate, usually between 1.5 and 6% of the invoice amount
- Any additional costs for credit insurance
The difference between Unpaid and factoring
Both Unpaid and factoring companies work on your unpaid invoices, but that's where the comparison ends.
Factoring or advance payment is a financing instrument that ensures that you receive an advance payment as soon as you have issued your invoice.
Unpaid is engaged only when an unpaid invoice has expired. In that case, we help you to collect it quickly.
With Unpaid, you can target all your expired B2B invoices. This can include any invoices refused by the factoring agent. We send a bailiff to your customer within five working days, anywhere in Belgium. As soon as your customer pays, you will receive 100% of your money into your account, plus the limited advance you have paid us.