Different types of factoring
Factoring is an increasingly popular alternative method of financing for entrepreneurs. And that is not surprising, because factoring is the way par excellence to receive money at very short notice for work completed earlier, for which the invoice sent has not yet been paid. A total of three types of factoring can be distinguished: traditional factoring, American factoring and reverse factoring. But how do these types of factoring actually work and to what extent do they differ from each other and what are their advantages and disadvantages?
Traditional factoring is traditionally the original form of factoring. In traditional factoring, you often receive a revolving credit from the factor over a longer period of time. This credit is based on the total debtors you currently have outstanding. On the other hand, with traditional factoring, you have the obligation to transfer all your debtors to the factor. This means you have to sell all your invoices, where with other forms of factoring you have more freedom in which invoice you do or do not sell.
Because a minimum turnover must be met in order to use traditional factoring, this form of factoring is especially suitable for larger companies. Traditional factoring is therefore less accessible than other types of factoring. On the other hand, when you meet the requirements for traditional factoring, contracts are often entered into for a longer period of time – usually several years. As a result, you are therefore assured of a long-term collaboration, which also ensures relatively simple administration – after all, all invoices go through the factor.
Advantages of traditional factoring
- Security: the longer contracts ensure that you are assured of a long-term collaboration.
- Simple administration: Because all invoices run through the factor, you deal with relatively simple administration.
Disadvantages of traditional factoring
- Less flexibility: you sell all invoices to the factor, making you less flexible than with other types of factoring.
- Relatively high requirements: due to the relatively high turnover requirements, traditional factoring is often not suitable for smaller companies.
American factoring is probably the most well-known and well-known type of factoring. This is for a number of reasons. First of all, the requirements to use American factoring are a lot lower than for other types of factoring. Because American factoring is a lot more accessible than, say, traditional factoring, it is ideally suited to self-employed factoring or SME factoring.
American factoring is not only a lot more accessible than traditional factoring; American factoring is also a lot more flexible. Whereas with traditional factoring you are required to sell all invoices to the factor, with American factoring you can choose which invoices you do and do not sell. So, do you send fewer invoices to the factor one time, or perhaps no invoices at all? In that case, you won’t have incurred any costs. One disadvantage of American factoring: the factor has the right to reject an invoice for factoring. This often has to do with the creditworthiness of the customer whose invoice you are selling. If this is deemed too low by the factor, the invoice in question may be rejected.
Advantages American factoring
- Flexibility: you can start quickly and choose which invoices you do and do not sell.
- Accessibility: the (turnover) requirements for American factoring are many times lower than those for traidtional factoring. It makes American factoring extremely suitable for SMEs and self-employed people.
Disadvantages of American factoring
- More complicated administration: because you sell some invoices and some not, you have to keep records of which invoices you have through the factor.
- Costs: the cost per invoice is relatively slightly higher than if you use traditional factoring.
Are there invoices you need to pay, but cannot manage to do so within the legal payment period? In such a case, reverse factoring is ideally suited. The name actually says it all: reverse factoring is a type of factoring that actually works the other way round. Whereas American factoring and traditional factoring are about getting money in earlier for invoices sent, reverse factoring is about ‘buying’ more time to pay an invoice. Here, the factor ensures that the amount in question is paid to the creditor within the set payment period, after which you are granted a longer payment period by the factor.
As an entrepreneur, do you have outstanding invoices from a creditor? Then it can often be a good solution for both parties to place the invoices with a factor. As a result, the creditor gets its money faster and the debtor gives himself longer to complete the payment.
One drawback to reverse factoring: the creditworthiness requirements – in order to minimise non-payment – are relatively high. Moreover, reverse factoring often involves partnerships for longer periods. It makes reverse factoring relatively high-threshold to get started. Moreover, the debtor must be willing to cooperate in factoring in order for the creditworthiness to be assessed.
Advantages of reverse factoring
- Longer payment period: by using reverse factoring, you give yourself longer to pay an invoice.
- Fast payment: because reverse factoring involves approved invoices, payment can often be made quickly.
Disadvantages of reverse factoring
- Dependent on the debtor: the debtor must agree to reverse factoring in order for creditworthiness to be assessed.