Factoring involves a financial transaction in which a company “transfers” its invoices to a third party, a so-called factor. “Factoring consists of three basic services, giving the customer three options to choose from”, stated Jean Guinée. “The first service covers the complete administration and follow-up of invoices, whereby a company outsources its credit management. What is a time consuming and difficult process for many companies, is core business for a factor. The second service involves the factor making advance payments on outstanding invoices. As a rule such advances amount to between 75 and 95% of the invoice amount. This is the most well-known part of factoring. The third service relates to the factor providing insolvency protection for outstanding invoices, i.e. the factor will pay overdue invoices even if the end customer defaults. This way the credit risk shifts entirely to the factor.”
The main advantage of factoring is that it allows a company to optimize its accounts receivable position. Much needed working capital isn’t locked away in outstanding invoices. “Indeed, you don’t have to wait for your debtor to pay in order to use locked funds to grow your business, e.g. to pay suppliers or meet your tax obligations”, Jean Guinée added. “You should not underestimate the impact of unpaid invoices. It is generally assumed that approximately a quarter of bankruptcies in Belgium are due to bad or non-paying customers. Moreover, another benefit is that financing through factoring grows in line with your turnover, which is different from, for example, a credit line whereby we generally talk about a line of credit with a fixed maximum.”
Jean Guinée provided an example of how quickly liquidity problems can sometimes overwhelm a company. “Suppose you have a customer with 100,000 euro worth of outstanding receivables that are not being paid and your business applies a margin of 10%. If that is the case you already have to generate an additional million euro in turnover to make up for that loss.”
As a broker Vanbreda Credinco works in conjunction with various factoring companies. “Opening up a dossier always involves an in-depth market study, one or more conversations with the customer and requests for quotation. Usually the start-up process has been completed within two months”, Jean Guinée commented, “and that relates to specific cases in which we also have to provide financing, in which case a credit committee is involved. If a company opts solely for insolvency insurance or debtor follow-up, the process is often completed even more quickly.”
The costs associated with factoring roughly consist of two components. Jean Guinée: “The first component involves a percentage of the turnover, depending on what kind of services are procured, the amount of turnover the company generates, how many invoices are issued, etc. We also review the historical loss account. Does the company have an interminable list of bad payers? If that is the case the risk is obviously greater, which will be reflected in the price. The second component relates to the interest on the actual level of finance taken on. The higher the amount taken up from a credit line, the higher this amount will be. Pricing is always tailored to requirements; there’s no such thing as standard prices.”
In principle, any B2B sector that works with collectible invoices is eligible for factoring. Jean Guinée: “We do, of course, observe certain trends. In sectors subject to a lot of seasonal fluctuations, for example, factoring is a particularly interesting option. Typical examples include textile, transportation, services, trading, wholesalers, shipowners, printing, IT, etc.”
And last but not least: a factor will typically choose to take on the entire portfolio of invoices. Jean Guinée: “Exceptions to this are possible and are always determined by mutual agreement with the client. For example, in consultation with the company the factor may limit their services to a particular country (for exporting companies), subsidiary or product line. Successful communications and sound agreements will promote a close partnership with the customer.”
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