Factoring is a form of financing and a service. A factoring company can give you a credit or provide (largely) direct payment of your invoices. In addition, a factoring company can take over your debtor management. This way you can keep the cash flow going. And you save yourself the burden of the collection process.
Factoring consists of three parts:
In addition to or instead of, for example, a bank loan or crowdfunding, you can opt for factoring as a financing form. The factoring company provides you with a financial buffer. As a result, you immediately get working capital back and you can invest faster to expand or keep your business operations going.
The second component of factoring is the outsourcing of your debtor management. You can outsource your entire credit management to the factoring company or only one or more debtors (customer files).
Cover credit risk
A factoring company can also fully take over the risk that a debtor does not pay. You do not need to take out your own credit insurance.
Two types of factoring
Factoring can easily be divided into two main variants:
- Traditional factoring
With traditional factoring, you receive credit based on a percentage of your total outstanding debtor portfolio (number of customers + size of invoices). Most traditional factoring companies ask a fixed amount per year or a small percentage of your turnover (between 0.1 and 1 percent) in return. The major providers of this form of factoring are mainly banks or subsidiaries of banks and therefore have to comply with many protective but restrictive rules. As a result, you as a customer must meet many additional requirements. Not all providers also take over your credit management and there is no automatic hedging of the credit risk. Traditional factoring is particularly suitable for medium and large companies.
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With the companies you do not receive a fixed credit, but you can submit separate invoices. Within 48 hours the full submitted invoice amount will be paid minus the agreed costs for factoring. The factoring company usually requires between 3 and 6 percent of the invoice amount and in return accepts the recovery procedure and the associated risk. This way of factoring is more suitable for SMEs. Many business holders have gained huge profits through factoring services. You would undoubtedly get many advantages if you get proper Factoring Company Guide and factoring companies’ services.