Almost 20 percent of SMEs need external financing, according to the 2021 funding monitor by the Central Bureau of Statistics (CBS). The best way to finance is different for each company. For example, factoring is not suitable for every company. For example, because a product or service must be delivered first before you get paid. In this blog, we therefore explain the difference between factoring and direct lending,

What is factoring?

In short, factoring is a company that receives and advances your invoices. In this case, your invoices are paid to you directly by the factoring company. The factoring company then invoices your end customer. There are costs associated with factoring. In general, this concerns approximately 2 to 5 percent of the invoice amount. Some of the benefits of factoring are:

• You have your money right away — on average, it takes 40 days for invoices to be paid. Money that hasn't arrived yet cannot be used to invest. When factoring, your invoices are usually paid within 24 hours.
• No problems with defaulters — you will get the invoice paid immediately.
• Saving time — you can save time and energy because you no longer have to worry about debtor management.

Factoring disadvantages

In addition to the advantages of factoring, there are also disadvantages. For example, not everyone likes to relinquish control. It can also be strange for your end customers. For example, if they are suddenly approached by a foreign party for payment. If a good customer of yours is having an equally difficult time, the factoring company may react differently than how you would solve it. Therefore, keep in mind that you have no further influence on this.

The biggest disadvantage of factoring (and the reason it's not equally suitable for everyone) is that invoices can only be submitted for products delivered and completed services. Pre-financing is therefore not possible.

Types of factoring

There are different types of factoring. The most common forms are traditional factoring and American factoring. In traditional factoring, you sell your invoices to a factoring company. For this, you will receive a prepayment in the form of a credit. The entire debtor database is hereby taken care of. With American factoring, you decide which invoices you want to outsource and which you don't. This way, you remain flexible and you also maintain some control. However, the costs for this form of factoring are relatively higher. Traditional factoring is therefore the cheapest form of factoring.

Is factoring suitable for everyone?

With factoring, you will only get paid once you have sent the invoice. These invoices must be based on products delivered and/or completed services. Keep in mind that factoring is only appropriate once your services have been completed. This also applies to products. If your products haven't been delivered yet, you can't get an advance to pay the invoices yet.

To name an example: if a construction company needs 20,000 euros to invest in material, factoring is not possible. This is because you cannot yet issue an invoice for the services provided, because the project has not been completed yet. If, in addition to purchasing and materials, you want to invest in growth or marketing, it is better to opt for a loan in such a case.

What is direct lending?

Direct lending is a business loan without the intervention of a bank. A big difference between direct lending and bank borrowing is that with direct lending, you have your money quickly and that less administrative input is required. There will be a direct loan mainly looked at the current status of your company and the development within the market. This is also an important difference between borrowing money from the bank and factoring.

As a rule, a factoring company also looks more at the current situation and debtors, rather than the results achieved at the time. For both factoring and direct lending, your company must have a Dutch identity. But what are the differences between direct lending and factoring?

Factoring vs direct lending: the differences

One of the biggest differences between direct lending and factoring is that you don't actually borrow money when factoring. As it were, you outsource your invoices and payment thereof to external parties. Factoring therefore does not involve collateral: the outstanding invoice then fulfils the role of collateral. A direct lender usually asks for collateral, but to a lesser extent than a bank does.

Unlike factoring, direct lending is a one-off transaction. Factoring is an ongoing process. With direct lending, you can also use financing before you have delivered the products or services. This makes direct lending ideal if you want to pre-finance. In general, it's better to opt for a business loan if you want to invest in assets.

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