FAQ

Step 1: Sale of Invoices

Your company provides goods or services to a customer and sends invoices with payment terms of 30 to 90 days. Instead of waiting for payment, you can choose to transfer these invoices through an assignment to a factoring company, allowing you to access your money more quickly.

Step 2: Pre-financing

After selling your invoices to the factoring company, you will receive a purchase price or an advance, usually between 75% and 98% of the invoice amount (VAT included). In advance, the factoring company conducts the contractually agreed-upon checks. This advance is considered pre-financing and is often transferred to your account within 24 hours.

Step 3: Collection Process

The factoring company then takes over the entire accounts receivable management and ensures the collection of invoices as soon as they become due. In a "without recourse" contract, the factoring company assumes the risk of non-payment. However, in a "with recourse" contract, the risk of non-payment remains with your company.

Step 4: Settlement and Compensation

When the factoring company has received the full payment from the customer, it pays the remaining amount to your business. This is the invoice amount minus the previously paid advance and the factoring fees, which serve as compensation for the service provided. In the event of non-payment by your customer, insurance comes into effect under a "without recourse" contract. Under a "with recourse" contract (without insurance), you must repay the advance after an agreed period (usually 60 or 90 days after the due date).

• Improved liquidity

The main advantage of factoring is that it provides immediate access to more liquid funds. Factoring companies typically pay out the financing within 24 hours, allowing you to grow, invest, or pay your suppliers on time more quickly. Unlike other forms of financing, such as bank loans, the advance grows automatically with the growth of your business.

• Flexibility for your customers

Factoring provides the opportunity to offer your customers longer payment terms. Most factoring companies accept payment terms of up to 90 days after the invoice date, which gives you a strong commercial advantage.

• Credit assessment

Because factoring companies take on the risk of non-payment, they assess the creditworthiness of your customers. This gives you the assurance that you are working with creditworthy companies.

• Reduced risk

Factoring companies take over the risk of default within the established credit limits. This means that you are protected against both definitive insolvency (bankruptcy) and suspected insolvency, where a debtor has not paid 90 days after the invoice due date. As a result, you have more financial security and face less risk of uncollectible invoices.

• Time saving

A major advantage of factoring is that you can spend more time on running your business. The management of receivables, collections, and payment arrears is completely taken off your hands. This alleviates many concerns and keeps your cash flow running smoothly, allowing you to focus on the core activities of your company.

Factoring has different types, but the core remains the same: a factoring company takes over your outstanding invoices and you receive an immediate advance of a portion of the invoice amount.

• American style-factoring:   This popular form of factoring, especially among FinTech factoring companies and ideal for SMEs, offers financing of up to 98% of your outstanding invoices. You only pay a percentage of the revenue, typically between 1.8% and 5%, with no additional interest costs. Additionally, you retain full flexibility in selecting which invoices or debtors you want to include in the factoring program. Invoices that do not qualify for financing are simply not sold, meaning you do not incur factoring costs on non-advanced invoices..
• Traditional factoring:   Traditional factoring, typically offered by bank-related factoring companies, provides financing for 60% to 90% of your outstanding receivables. The factoring fee ranges from 0.1% to 3% of the turnover, but the financing occurs through a current account, where you also pay interest on the advanced amount. Unlike American-style factoring, you are required to route all your invoices through the factor, unless they are paid in cash. This form of factoring is particularly suitable for large enterprises..

Another distinction relates to whether or not to assume the debtor risk:

• Without recourse factoring:   In this case, the factoring company assumes the risk of default. For each debtor, you must request a credit limit in advance. Once this limit is approved, your invoices are insured by the factor against default, but only in the event of the debtor's insolvency and up to the amount of the granted credit limit. Obviously, commercial disputes are excluded from this insurance..
• With recourse factoring: The risk of default remains borne by yourself. This means that in the event of default, you will have to repay the financed amounts. Specifically, this means that as soon as an invoice is overdue for too long (60 days), the financing on new invoices will be used to repay the financing on that overdue invoice. It is generally also possible for you to have the factoring company become the beneficiary of your credit insurance contract. Then, the factoring company will only finance within the issued credit limits. However, in the case of default, you will still have to repay the financing to the factor first. The factoring company does not want to wait for the payout from the insurer (which usually happens much later)..

Furthermore, factoring is also referred to according to the way your debtors are informed about the factoring:

• Notified factoring: In this form, your customer is informed that the invoices have been transferred to the factoring company. This is done through a notice on the invoice, stating that payments must be made exclusively to the factor. This is the legally correct procedure.
• Confidential factoring:  In this form of factoring, the debtors are not informed about the transfer of the invoices. The accounts receivable management usually remains in the hands of the factoring client. Although this method is legally less secure—because the transfer is only enforceable once the debtor has been officially notified—the bank account number on the invoice remains that of the factoring company. However, if the debtor pays the supplier directly, this payment is generally considered valid. This form of factoring is primarily used by bank factors for large enterprises..

Many claims are made about factoring. Due to ignorance, there are also many falsehoods associated with it. Below are some statements that will be debunked or confirmed:

Statement 1: "Factoring is not possible if I only have one or two customers."

This is one of the biggest misunderstandings. Traditional bank-related factoring companies often impose concentration limits, where one client can make up a maximum of 20% of your total portfolio to limit the risk of default. This helps them keep the impact manageable in cases of disputes or non-payments.

However, many American-style factoring companies do not impose this restriction. They even accept contracts with just a single debtor, as long as each invoice is approved in advance by the debtor. This minimizes the risk of unexpected disputes and allows companies with a limited number of clients to still make use of factoring.

Statement 2: "Construction companies cannot make use of factoring."

This is a common misconception. The challenge for construction companies lies in the withholding obligation that applies when a contractor has arrears on social security or VAT. In that case, the debtor must make payments directly to the Belgian government, which is risky for factoring companies.

Nevertheless, many American-style factoring companies are willing to finance construction companies, provided there is good follow-up and the financing rate is adjusted to the specific risks of the sector. As a result, factoring remains a viable option for construction companies.

Statement 3: "Advance invoices cannot be invoiced."

This statement is correct. Factoring companies only finance invoices for goods or services that have been fully delivered at the time of invoicing. Even if a debtor agrees to a partial delivery, there remains the risk of a dispute arising if the rest of the delivery is delayed. This risk is too great for factoring companies, which is why advance invoices or interim invoices are not eligible for factoring.

Statement 4: "Factoring is only for companies in financial difficulties."

This is an outdated idea. In Belgium, as much as 20% of the Gross National Product is financed through factoring, which amounts to more than 80 billion euros. Factoring is therefore anything but a marginal phenomenon. Additionally, banks have become increasingly reluctant to provide loans to SMEs, making factoring a more attractive and flexible alternative for growing companies. Financing automatically grows in line with revenue.

Moreover, factoring is recognized by the European Union as an essential part of the economy; a regulation from 2021 states that your client cannot prohibit you from working with factoring.

Statement 5: "Factoring is expensive."

It depends on how you look at it. If you only consider factoring as a form of credit, it may seem more expensive than other financing options. But factoring offers much more than just financing: it provides flexibility, supports growth, takes care of accounts receivable management and collections, offers protection against default, and conducts prior credit checks on your customers. These additional services save entrepreneurs a lot of time and worry, making factoring a valuable investment. Especially for fast-growing companies, the benefits often far outweigh the costs.

Factoring emerged as a distinct financial service in the 1960s and 1970s. Due to its growing demand and competitive edge, banks quickly took interest and began offering factoring services. By the late 20th century, most major banks had acquired factoring companies, gradually transforming factoring into a standard banking product. To align it more with traditional banking offerings, banks rebranded factoring as 'commercial finance,' although the core service remained unchanged. 

 Over the past two decades, these bank-driven factoring products have become increasingly integrated into broader banking operations. As a result, potential clients are now often evaluated based on banking criteria, leading to stricter terms and conditions. 

 Simultaneously, the rise of Fintech companies has introduced a new wave of factoring providers. These firms place greater emphasis on the business performance and the quality of its debtors. In the Netherlands, Fintech-driven factoring now accounts for 50% of the market, while Belgium has been slower to adopt this trend.

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