Posted on 26.09.2019, 13:03
What should I keep in regard, when I choose between financing options? What is the best fit for my needs? Factoring or traditional bank loans?
Factoring increases liquidity and offers low credit risk, but what does it really mean? Factoring is an umbrella term for two forms of invoice financing: invoice purchase (invoice sales) and invoice mortgaging. Common for all of them is that businesses, via the creditor, can get access to cash within 24 hours, rather than wait for 30-90 days which is not uncommon for traditional bank loans. The advantage of this is that it enables a quicker re-investment of capital, e.g. facilitating a greater number of projects. This has made factoring popular among small and large businesses.
The definition of guaranty is a physical or legal person that assumes financial responsibility for another part. Within factoring this means to assume the responsibility of payment in case the invoice recipient for some reason opposes, or defaults payment. In the market today we often talk of factoring without guaranty. We advise customers to carefully observe terms like care bail and personal guarantee agreements.
Factoring with or without Regress
What does Factoring with or without Regress mean? Regress means that a company guarantees the payment of the factoring recipient. In case the factoring recipient opposes or defaults on payment the factoring party has right to demand a return of the financed amount. Regress is viewed in different ways and can have negative connotations among some actors.
Factoring = Invoice purchasing & Invoice sales
The business terms differ between different factoring companies, and in some cases, it is required that you commit to sell a fixed amount of invoices. In order to take advantage of the factoring service it is common that a yearly fee is charged on top of the cost of financing each invoice. At LogiqPay where we have no such requirements – no fixed amounts and no running costs. You can choose freely when you want to sell your invoices.
The second term in Factoring is Invoice mortgaging, which means that the invoices are used as surety for a loan. The loan to value ratio may vary and you receive 60-95% initially and the remaining sum on the date of maturity. The fee for this type of factoring varies but is generally around 2-6% of the total sum of the invoice. When mortgaging invoices you are also charged additional interest for the factoring credit, usually 4-16% depending on the factoring provider and the size of the credit.
Dynamic invoice financing
Factoring directly in your existing ERP-system! LogiqPay Dynamic allows you to set parameters according to your individual invoice financing requirements, within your business system. It basically means a minimum of administrative efforts and an integration of the factoring service with a system already in place. You adjust parameters such as date of credit, amount, rating etc, and if the invoice meets the criteria it will be singled out for financing. There is always the option to stop or modify the factoring agreement. It is simply a factoring service adapted to the needs of your business.
Examples of parameters in dynamic factoring
- Time period: 1 December 2019 – 31 September 2020
- Credit rating: AAA & AA
- Time of credit: 31-90 days
When the parameters match the invoice it will automatically be sold.
Other forms of finance
For long term investment it may be worth considering a bank loan. If you are able to utilize the entire funding it is a cost-effective way to obtain liquid capital. In order for the bank to approve a loan it is vital to be able to present a good repayment record. The process of application for a bank loan is often lengthy and extensive, requiring the company to have executed final accounts, proof of solid balance sheets and that owners of the business are prepared to guarantee the loan. If one chooses to finance a business venture through bank loans it is vital to plan ahead, or there is considerable risk of lost opportunities to expand and take on new projects while waiting for credit approval.
Overdraft facilities makes it possible for a business to continuously borrow up to a certain limit. One of the biggest advantages with this method of financing, is that interest is only charged on the amount spent. However, a disadvantage is that the interest generally is higher than an average bank loan, and an additional yearly fee also applies. The overdraft facility also requires surety and the processing time can be lengthy.
An alternative when your business is in need of inventory, cars or machinery etc. The process is basically that the provider of the goods in question sell it to a financing company, which in turn lets the goods to your business. The sum and period of lease is agreed with the provider, and at the end of the lease the object is returned, alternatively you are offered to purchase it. The advantage of leasing is that you do not own the object, and thus it does not burden your balance sheet, but as a direct costs.
- Factoring – Umbrella term for invoice sales and mortgaging.
- Guaranty – A physical or legal person undertakes financial responsibility for another party, common for many factoring companies.
- Regress – In case the invoice recipient defaults on payment within agreed time the responsibility of payment falls on the party that issued the invoice.
- Invoice sales – To sell an invoice to a factoring actor.
- Invoice mortgaging – Invoice mortgage example: Day 1:75%. Maturity date: remaining amount subtracted with interest and fees.
- Dynamic invoice financing – Factoring integrated in an existing ERP-system. Set the parameters and the rest will be automated, LogiqPay Dynamic.
- Bank loan – High requirements of surety and lengthy process of application. Good for long term investments.
- Overdraft facility – Lengthy application process before startup. An advantage is that interest is only charged on the sum spent.
- Leasing – To rent inventories, cars and machinery etc. May be positive for balance sheet since leasing is classified as direct costs instead of assets.