What is factoring? The most logical lender for entrepreneurs

FactoringVergelijken.nl - Arnoud Kuipers

When you first start your own business, you open up worlds you previously didn’t even know existed — do you know what social proof is and if you need to apply this tactic? What do you have to consider when you start a business, which pitfalls can you avoid and which topics need emphasis?

In this series, you read about various themes that are important to new entrepreneurs. Not taken from ‘These are the Nine Things you Absolutely have to do’-articles, but from people. Our people. five entrepreneurs from StartDock talk about their company and their industry so that you can learn from them. In this part we talked to Arnoud, he is the first in the Netherlands to start a factoring comparison website. 

What is factoring?

For every advantage that entrepreneurship has on working as an employee, there is a challenge to find that you never have to think about as an employee. Factoring is a solution for such a challenge.

When it takes weeks or even months for an invoice to be paid, that is a major problem. Money in the bank is oxygen for an entrepreneur and you cannot live without oxygen. A factoring company ensures that you get paid without the invoice already being paid by your customer and then takes a few percents of the invoice. Arnoud: ‘Factoring helps entrepreneurs with their liquidity, you increase the possibilities when you do business with a company with a very long payment term. It is very annoying if you have delivered your product or service and that company only pays you after many weeks or months. There is a gap, the service or product has been delivered and now you have to wait. If you want to fill that gap, factoring is the right tool to use in this situation.’

An invoice is not a salary

The moment you send an invoice you may have the impression that it is your money already. Just as you can expect that if you work for an employer, you should receive a monthly income. Only a written invoice is technically a debtor or a debt that still has to be collected. Arnoud: ‘From a legal point of view, it is not your money yet, because it is not yet in your account. You are entitled to it and in 99% of the cases, you will receive it. But the person who has to pay your invoice can go bankrupt or a dispute can arise. Factoring solves this. In addition to having your money faster, factoring also provides security. This way, you cover your risks.’

When a factoring company advances your invoice, this is a form of credit. Arnoud: ‘Factoring works just like any other loan. You put down a collateral. Real estate gets financed with a mortgage, you lease cars and you “factor” invoices. In this case, the invoice is the collateral.’

Why do companies hold their money for so long?

Arnoud: ‘It is usually to the advantage of companies to extend the payment as long as possible. The later you pay, the better it is for your liquidity. That is, of course, a game that many large companies play. They can play it because other companies do business with them anyway. Everyone wants to do business with Philips or De Bijenkorf for example. They have a dominant position. Often the smaller companies just have to accept the payment terms. If you do business with a large company, they usually have a whole list of purchasing conditions. You can deliver to them, but ... and then there is are the things you have to comply with. One of the conditions may be that they only pay after 60 or 90 days. That is immense for those companies. They can pay very late and already have collected a lot of money from customers. With that money, they have a better balance sheet position and with that, they get better conditions to possibly attract new money. Also, they can pay their purchases faster so that they can negotiate purchase discounts; it is a positive spiral.’ 

Who uses factoring?

Arnoud: ‘People that look for factoring are very diverse. This ranges from self-employed people who make 40 to 50 thousand euros a year in turnover to larger companies with a turnover of several hundred million or more. The majority of the companies that use our site are between 100k and 10 million in terms of turnover. The main reason for factoring is as a loan. Furthermore, it is sometimes also be used as credit insurance or as outsourcing the reminder of debtors because the company does not feel like doing it.’

FactoringVergelijken.nl

Arnoud: "I first worked at Graydon, which is a credit and information agency, and then at IFN Finance, which is a subsidiary of ABN-AMRO. IFN Finance is a factoring company and I have always been in the New Business department there. I have done a lot of deals and visited different companies, such as a wholesaler in flower pots, employment agencies or transport companies. I enjoyed doing that for five years. I knew at this time that there were intermediaries (or: brokers) in the field of factoring, but not online. I then started the very first online factoring comparison website. From day one, I got leads. Today, there are around thirty different factoring companies in the Netherlands, when I started seven years ago there was a maximum of ten. "

Because Arnoud started something that did not yet exist, it was difficult to estimate whether it would succeed. Arnoud: ‘I started small and I quickly tested whether there was a market fit. With WordPress, I made a very primitive website. It didn't look that good, but the purpose of the website was clear. You can test an idea for about a hundred euros. Spend some money on Adwords and see what happens. That way you know if it has potential.’

More of the same

‘I weekly receive calls asking me if a new factoring company can join us. At some point, it doesn't make much sense anymore, because I only get a limited number of leads and I can't send them everywhere.

When a new factoring company calls me, I ask them how they distinguish themselves. Everyone thinks that the way they do it is unique, but often it comes down to the same thing. Only if you do factoring with stock financing or purchasing financing, for example, you can distinguish yourself because not many others do that.’

Being first or being the only one is not a condition for entrepreneurship. This is how Arnoud sees it: ‘There are quite a few competitors now and that is very logical and healthy. Others also saw the possibility to step in and that is fine. It's the same as having multiple sites to compare gas and light prices. Many have since gone bankrupt. I like to keep on growing, enter new markets and keep innovating my product.’