Get your money faster with factoring

Factoring is the sale of outstanding invoices to a factoring company. You receive 80-90% of the invoice value immediately; the factor collects from the customer, and upon receipt, you receive the remainder minus a factoring fee (typically 1-3% per invoice). With recourse: you bear the debtor risk in the event of non-payment. Without recourse: the factor bears the risk (more expensive). For SMEs with slow payers: immediate cash flow acceleration. Below is how it works, the costs, and when it pays off.

The short answer

• What: Sell invoices to a factoring company for immediate cash.
• Advance payment: 80-90% of invoice value paid immediately.
• Costs: 1-3% of invoice value — depending on recourse and volume.
• Variants: with recourse (you bear the risk), without recourse (risk factor, more expensive).
• For whom: B2B SMEs with slow payers (45-90 day term).

How does factoring work?

1. You send the invoice to your customer — copy to the factor.
2. Factor pays out 80-90% of the invoice value to you immediately.
3. Customer sees factoring mention on invoice — pays to factor.
4. Factor collects customer payment (in the case of open sales) or collects (in the case of silent sales).
5. Upon receipt: the factor pays the remainder to you minus the factor fee.
6. In case of customer default: with recourse → you repay the advance. Without recourse → the factor bears the loss.

With or without recourse?

With recourse (recourse factoring)

Cheaper (1-2% per invoice). In case of customer default: you repay the advance to the factor. Essentially working capital financing with the factor acting as a temporary bridge.

Without recourse (non-recourse factoring)

More expensive (2-3% per invoice, sometimes up to 4%). The factor bears the debtor risk — the money is “sold”. In the event of non-payment: the factor bears the loss, you remain unaffected.

For: peace of mind, kasmate certainty. Against: factor screens customers and can reject an invoice.

Open versus silent factoring

• Open factoring: factor name visible on invoice, customer pays the factor. Most common.
• Silent factoring: the client sees nothing and pays you (into an account that flows to the factor). More discreet but more expensive.

For B2C or SMEs requiring discretion: silent factoring or accounts receivable financing (see accounts receivable financing) is often preferred.

Factoring costs

• Factoring fee per invoice: 1-3% of invoice value (cheaper with recourse).
• Interest on advance: 5-10% per year (for the days the advance is outstanding).
• Setup costs:€500-€2,500 one-off.
• Minimum invoice volume: usually €300,000-€1,000,000 per year.
• Contract term: 1-3 years minimum, often with a notice period.

Example: €50,000 invoice, payment term 60 days, with recourse 1.5% factoring fee + 7% interest over 60 days:

• Down payment 85% = € 42,500 immediately.
• Factor fee: € 750.
• Interest: € 42,500 × 7% × 60/365 = € 489.
• Total costs: €1,239 on a €50,000 invoice = 2.5% effective.

Pros and cons

Advantages

• Fast cash — sometimes within 24 hours of the invoice.
• No collateral required (factor has invoice).
• Without recourse: debtor risk transferred.
• Factor handles debt collection — less work for you.
• More flexible acceptance than bank financing.

Disadvantages

• Relatively expensive — typically 8-12% effective.
• Customers see factor name (signal of cash flow pressure).
• Long-term contracts with minimum volume obligations.
• Disputed invoices often excluded.
• Once in factoring, it is difficult to get out (relationship with the factor).

When to use factoring?

• Acute cash flow pressure and no time for the bank process.
• Rapidly growing revenue with increasing working capital requirements.
• Long payment terms (60-90 days) for major customers.
• Insufficient bank financing available.
• Desire to transfer debtor risk (without recourse).

Karim's consideration

Karim's ICT operating company is considering factoring:

• Pros: quick cash (4 days instead of 60), accounts receivable administration eliminated.
• Cons: factoring name on invoice (some customers sensitive), total costs 9% effective.

Karim opts for debtor financing instead of factoring: more discreet, cheaper (7% effective), same advance payment. For other businesses with different priorities, factoring might be better.

Honest recommendation

Factoring is suitable for SMEs facing cash flow pressure and long payment terms — especially if the transfer of debtor risk (without recourse) is desired. For B2B with discreet customer relationships or a need for a flexible structure, debtor financing is often a better choice. Read contracts carefully: minimum volume, notice period, and which invoices are accepted. Compare at least 3 factoring companies for price differences.

For other topics: accounts receivable financing, working capital financing and engaging a collection agency.

Frequently Asked Questions