Factoring, what exactly is it? When you use factoring, you place your accounts receivable administration in the hands of the factoring company. Besides the fact that it saves a lot of time, you also outsource the financial aspect. This therefore reduces the risks for the company. It can be a very good solution for companies that deal with poorly paying debtors. However, it is not the best solution in all cases. That is why it is good to first list some things. What are the costs? And what are the advantages and disadvantages compared to a collection agency?
For what reasons do you use factoring?
Nowadays more and more companies are faced with so-called bad debts. This means that debtors cannot pay the invoice amount, as a result of which the amount cannot be paid within the specified payment term. If you no longer feel like chasing bad debts all the time, you can outsource this. You can then do business with a factoring company. Such a factoring company often takes over the entire accounts receivable administration. So they also take over the risks from you. Even if you have a company that is growing rapidly, you can consider factoring. Because when a company grows, it means that you will have to make new investments. For example, purchasing new furniture when a lot of new staff has been hired. If you do not have enough money within your current budget, you could also consider factoring. This way you temporarily don’t have to worry about the outstanding items of your debtors. You just get the money so you can invest in the growth of the company.
What does it cost to work with a factoring company?
It is not always wise to do business with a factoring company. Before you take this step, it is good to know whether it is profitable in your case. It is wise to discuss this with your financial advisor.
If you have a company with an annual turnover of less than 250,000, it is generally not wise to use a factoring company. In this case it will cost you more than it would ultimately yield.
With factoring you pay a fixed amount per year, half year or quarter. You also pay a fixed amount for each invoice that is advanced, this is usually around €25. They also claim a share of the turnover. This is often around 5%. In addition, any postage and copying costs will be charged. Factoring is often only sensible if you have a reasonably high turnover. Otherwise you will not recover the costs!
What steps need to be taken before engaging a factoring company?
A factoring company does not simply take over the accounts receivable administration of any company. First they look at the creditworthiness of the customers. When these companies are all almost bankrupt, it is of course not smart to take over the accounts receivable administration. Then this is far too great a risk. The factoring company also sets a limit. They then advance the debtor’s money up to that amount. This way, your own company will not quickly run into financial problems because your debtors pay too late. The money is always advanced by the factoring company.
- Payment terms may not exceed 180 days.
- Factoring for private individuals is not possible (so only for other companies).
- The debtor portfolio must be spread.
A factoring company would rather take over a portfolio with a hundred debtors with invoices of around 1,000 euros than a portfolio with a few debtors with very large invoices. In the latter case, the risk for the factoring company is also too great.