The Ultimate Guide to Factoring in 2021
July 4, 2022
Table of Contents
If you are an entrepreneur or own your own company, you will probably have come across factoring when thinking of different ways to finance your business. If you aren’t too sure what it is or have never heard of it, this article is for you!
In this article, you will learn more about what factoring is, how it works, its benefits as well as its risks, and discover some of the top companies offering factoring services around the world.
What is it?
Factoring is a financial term used to describe a transaction or a kind of debtor finance in which a company sells its accounts receivable to an external party (known as a factor) for a lesser price. A business will sometimes decide to factor its receivable assets in order to its more immediate cash needs.
Forfaiting is the financial term used to describe a factoring arrangement used within international trade. Exporters who want to sell their accounts receivable to a forfaiter use this factoring arrangement. People will most often refer to factoring as accounts receivable factoring, invoice factoring, or sometimes accounts receivable financing. The term accounts receivable financing more accurately describes a form of asset-based lending against receivables.
The Commercial Finance Association is the most important trade association of the asset-based factoring and lending markets.
In the US, invoice discounting (called an assignment of accounts receivable in American accounting) and factoring are two different things. Invoice discounting describes the borrowing that involves the use of the receivables as collateral for the loan. Factoring describes the selling of the accounts receivable.
Still, in markets such as the UK, invoice discounting is seen as a type of factoring that involves the assignment of accounts receivables and that is taken into account in factoring statistics. That also means it isn’t considered as borrowing. This arrangement will most often be confidential. This means that the debtor is not made aware of the assignment of accounts receivable. It also means that the seller of the accounts receivable takes in the debt on behalf of the factor.
How does factoring work?
As mentioned above, invoice factoring refers to the selling of a part or full amount of a business’s receivables. This is how it works:
- A business will offer its services or products to its clients, just as usual.
- The clients are then invoiced for the products or services they purchased.
- The raised invoice is then sold to a factoring third party. This third party then pays the business the bulk of the invoiced amount straight away, most often about 80 or 90 percent of the value, after having made sure that the invoice is valid.
- The clients will then pay the factoring third party directly. The factoring third part can then be the one chasing invoice payments that aren’t happening.
- The factoring third-party then pays the remaining amount of the invoice to the business, minus their fee, once they have received the full payment for the client.
The benefits of factoring
There are of course some major benefits to factoring. Here are a few:
International factoring companies like Tradewind Finance have an edge over domestic companies because of their network of offices and affiliates available in different regions of the globe. Tradewind’s international presence positions them to work with clients at both ends of the transaction, providing local market insights and on-the-ground support. Based on your company’s client profile, you can choose a suitable range of services that meet your requirements, including financing arrangements structured in different currencies.
It isn’t a loan
Many entrepreneurs worry that by factoring the invoices of their business, they might risk getting a lower credit score. However, one of the main elements of factoring is that it is not a loan.This means that this way of financing does not appear on the business’s balance sheet as a debt.
You receive a guarantee
There is always a risk that clients won’t pay what they owe. However, when you have a reliable factoring partner that offers non-recourse financing, you benefit from their financial resources, their credit protection. This means if a client is incapable of paying, you are still guaranteed your money.
Improvement of liquidity
When a business passes over its accounts receivable to a factoring partner, the financing they get in return helps the business regulate its cash flow. The amount of working capital that is available increases, meaning the business’s balance sheet includes more liquid assets and the company can grow quicker.
Minimized risks with credit investigation
In order to lessen the risk of collection, many factoring service providers offer to their customers a credit investigation service that gathers trustworthy information about a buyer’s reputation within their industry and their financial stability. With this data, you can limit the risks incurred by collection and develop a list of high-quality clients.
It will save you time
Time is absolutely crucial within the world of business. When running a business, it is important not to waste time unnecessarily. Keeping an eye on credit, orchestrating collections, and figuring out whether a client is credit-worthy or not, is essential to running a company safely. Such activities take a lot of time. However, they can be contracted to a factoring business who will then do them for you. This means you will have more time to concentrate on developing new ideas and strategies and on your core business activities.
It will save you money
If you decide to make use of a factoring company’s services, you will also be paying less overhead expenses because the factor will effectively become an extension of your own company by taking care of your bookkeeping and collections. Furthermore, you will be able to pay your suppliers in cash rather than credit, meaning you’ll be less at risk of losing money unnecessarily through late fees and penalties.
Higher Financial Status
Factoring makes it possible for a business to pay for its operations by using the capital it has created by selling its own receivables. This is different to other financing options. The business will receive a reduction in its commercial payables and collection times, meaning it will gain better financial stability. The company will be using its own resources to finance its needs and development, leading to a boost in business.
The risks to consider with invoice factoring
Invoice factoring is one way for companies to relieve the financial pressures upon them. It is easier and faster than getting a bank loan because it doesn’t depend on your years in operation or your credit.It it does is transform your existing customer invoices into cash which can then be used to pay for operation costs, without incurring any debt.
Invoice factoring is sometimes the only solution for a business in need of quick cash. Sometimes it is the option that makes most sense. However, there are some risks that need to be considered.
Is the factoring company trustworthy?
When the first factoring companies started to appear, a few of them started charging excessively high fees and used dishonest means, giving the whole industry a bad reputation. However, things have evolved since then and factoring has become widely accepted. It is now considered a trustworthy source of funding for many businesses across all markets.
Obviously, one should always exercise due diligence before starting any kind of business relationship. It is important to find out how long a factoring company has been operating and where they are located. You might also want to ask for referrals from existing clients and research whether the company has had any lawsuits or complaints. You can do this through simple search on Google, through the Better Business Bureau, or your regional authorities office. It is important you also trust your gut on such matters. If it doesn’t feel right, then you will probably not be able to build trust and there isn’t much point in going forward with it.
What happens with uncollectible invoices?
Some factoring companies will give you the option between recourse and non-recourse factoring arrangements to manage invoicing. Both options rid you of the hassle implicated in collecting invoices. This means you will have more time for other activities.
Recourse factoring means you take responsibility for paying the invoice. If your client doesn’t pay their debt, then you will be liable to pay the factoring partner. Non-recourse factoring means that you will be paying your factoring partner a slightly higher fee. However, you will also be mitigating the risks to your business. The factoring company will be fully responsible for debt collection. Non-recourse factoring is most often a better option for small companies who aren’t able to absorb unpaid invoices.
How will the factoring company communicate with your clients?
It is important that the factoring partner you choose has a clear way of processing your clients’ invoices and of communicating with them. They should be able to inspire trust.
Is your client worthy of credit?
In the world of business, perfect clients are rare and even the best will sometimes take time to pay invoices. It might even happen that they won’t be able to make the payment at all. This is the reason why it is vital for you to make sure that your potential clients are creditworthy before engaging with them.
Some factoring companies will be able to conduct routine credit checks for you, a task that takes up a lot of time, effort and money.
Factoring in Belgium
BNP Paribas Fortis Factor
BNP Paribas Fortis Factor offers businesses that are active in the B2B marketspace integrated solutions such as follow-up of management on receivables, credit risk protection, provision of cash against receivables and more.
BNP Paribas Fortis Factor is also an authorised intermediary in credit insurance.
They will offer a tailored experience which best suits your business’s needs. In addition to offering standard factoring services, they also offer solutions for businesses wanting to grow their working capital or to optimise their balance sheet.
They also have an important international network. As a BNP Paribas Fortis subsidiary, BNP Paribas Fortis Factor is part of the BNP Paribas Factoring network, a European leader in the factoring market in terms of geographic coverage, with a presence in 15 European, Asian and African countries.
They are also a member of Factors Chain International (FCI) which allows them to offer global factoring solutions.
BNP Paribas Fortis Factor has been established in Belgium since 1965 and now has 180 experts working to offer solutions to their customers.
ING Commercial Finance
ING Commercial Finance offers one basic package and two options.
Basic package concerns financing outstanding invoices. It entails that you ‘sell’ your outstanding invoices to ING Commercial Finance. You will then immediately receive an advance of 70% to 90% of the amount that the client has to pay to you. When ING has collected the full amount from the customer, then you will receive the balance of the funds. There is some interest you will need to pay for the advance payments and also a potential factoring compensation.
- You will be paid immediately for the services and products you provide.
- The invoices will no longer appear on your own balance sheet and you will be able to pay your suppliers faster. This will lead to an improved risk profile and better ratios for your company.
- You decide how much your outstanding invoices will be financed.
ING’s first option is debtor management. This means they will take care of the administration, follow-up and collection of all your receivables. ING also provides a ‘CreditView’ tool so you can track all your invoices, whether they be outgoing, incoming or outstanding. This will allow you to know exactly how much working capital you have at any time.
- You will be in possession of more working capital, due to the fact that the average payment period for your clients will become much shorter.
- You will have less unpaid invoices.
- You will be making savings on personnel and admin costs because you won’t be in charge of doing all the work yourself.
ING’s second option is that they take over the risk of non-payment by clients, either fully or in par. They will first make an assessment of what the risks are that a client might not pay. Based on this assessment, ING will determine the amount of default risk that they are willing to assume.
- You will be safe from any unpaid invoices
- You determine which clients ING will take the default risk for.
KBC Commercial Finance
KBC Commercial Finance (ComFin) can take care completely or partly of your debtor management and outstanding invoices. With their ComFin web app, you can let them know all the details concerning any open invoices you might have. If necessary, they will then send over an immediate advance payment of up to 85% of the amount of the outstanding invoice.
After that, KBC will follow up with your customer, meaning you don’t have to waste any time doing it yourself. Once the invoice has been paid by the customer, KBC will send over the rest of the amount on the invoice to you at once.
Top factoring companies across the world
Bibby Financial Services
Bibby Financial Services have supported small and medium-sized enterprises (SMEs) since 1982 and today work with more than 12,000 companies across the world.
Their parent company Bibby Line Group has been in business for more than 200 years and has companies in financial services, distribution, retail, shipping, marine and construction.
They are proud to help businesses, both big and small to grow and thrive in domestic and international markets.
altLINE is a division of The Southern Bank Company, which was founded in 1936. It has been a reputable and reliable community lender in its Northeast Alabama footprint for over 80 years.
While working locally with SMEs, The Southern Bank understands the consistent need for non-traditional commercial lines of credit. In response, The Southern Bank created altLINE, an Accounts Receivable based financing platform for commercial customers.
Operating within an FDIC insured and state regulated bank, altLINE provides customers the flexibility of an independent financing company with the cost advantages and service people expect from a community bank. altLINE partners with commercial bankers, accountants, business advisors, and other intermediaries nationwide to deploy its specialty lending capabilities wherever it may be needed.
Crédit Agricole Leasing and Factoring
Crédit Agricole Leasing & Factoring (CAL&F) is one of the Group’s subsidiaries that specialises in specialist financing. With € 22.9 billion in outstanding amounts managed, including 25% worldwide, it is a leading player in leasing contracts, factoring and financing of renewable energies in France and in Europe.
CAL&F provides support for companies of all sizes, both in their equipment and property investment projects and in the financing and management of their accounts receivable.
Factoring for CONNECTS members
Factoring is a quick and effective way for SMEs to increase their cash balance. There are also other ways in which you can make your life easier if you have a limited number of employees or a limited amount of resources.
Outsourcing and nearshoring are great ways to delegate tasks and specific business activities to a third party so that you can focus on your core activities.
Using an online business platform such as CONNECTS can also help you save time and effort. There you can find new opportunities, suppliers, partners, and clients all across the world, on a single platform, from the comfort of your own home.
Each and every member on the platform has also been evaluated and validated by a local Chamber of Commerce, allowing you to do business in which you can trust.
If you found this article interesting, you might also be interested in reading our article about how to write your business plan and our piece about business models.
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