Factoring for freelancers should always be an issue for you as a freelancer. Perhaps you have not yet dealt with this method of pre-financing invoices in more detail. Then you are exactly right here. In the following article you will find out exactly what factoring for freelancers is all about, what advantages it offers you and what exactly you have to do for it.
That is factoring
The term factoring is actually very easy to explain. You don’t have to understand anything else than the assignment or transfer of claims . Specifically, this means that you, as a freelancer, simply assign your claims that you have against a debtor to a factoring company. This means that by assigning the receivables you no longer have to live with a long payment term from your customers or even with the risk of a non-paying customer. There are always three participants in factoring. This is you as a freelancer who has provided a certain accountable service and, on the other hand, the factor. This factor can be a financial service provider or a bank, for example. The third participant in factoring is your customer. However, you have to distinguish between two types of factoring. There is real factoring and there is fake factoring.
The real factoring
- With real factoring, all claims are transferred to the factor . With the takeover, the latter also takes on the risk of bad debt losses.
- As a freelancer and thus as a supplier, you must be liable for the legality of the claims that have arisen.
The fake factoring
- With fake factoring, the risk remains with you as the service provider . However, you transfer the demands to the factor .
- This variant is particularly popular with freelancers because you only have to pay a small fee for factoring.
- As a supplier, however, you must also be liable here for the legality of the claims that have arisen.
Factoring offers these advantages for freelancers
Factoring does not only offer advantages to large companies. Factoring for freelancers in particular has many advantages and can sometimes have a decisive influence on your business growth and improve it significantly. All advantages of factoring for freelancers here for you clearly in a table.
Function of a financing
Perhaps you have already needed a loan as a freelancer . Then you surely know what a difficult endeavor this can be. Above all, you need a lot of patience and time until the time has finally come, and not every freelancer can afford that. In contrast to a loan, you do not need any collateral with factoring . From the first moment your liquidity is given and you automatically improve your equity ratio. This also has the positive effect that credit institutions rate you better and your creditworthiness increases significantly.
Protection against bad debts
With real factoring, you can enjoy complete protection against payment default . It is no longer a threatening catastrophe for you if a customer does not pay your bill. You have the protection that you or your accounting department have to initiate a dunning procedure or debt collection procedure, which would initially mean additional costs for you . For the services you have provided, you also get your well-earned money with factoring and benefit from punctual payment . You minimize the risk of default due to unpaid bills to practically zero.
Potential for optimization
Factoring for freelancers also offers you a lot of potential for optimizing your business. By assigning dunning and collection procedures, you relieve your bookkeeping . This means that you have a lot more time to take care of your core tasks. You also have the option of outsourcing the remaining accounting tasks.
Improving customer loyalty
With factoring for freelancers, you can improve your customer loyalty and even do something about customer acquisition . You are always able to offer your customers longer payment terms. With factoring, you can be sure that you will still get your money quickly.
Room for your own perks
Have you not been annoyed at one point or another that, for example , you could not take advantage of discounts or rebates for quick payment from your suppliers , because you simply did not have the necessary capital ? With the significant improvement in liquidity through factoring, you can give yourself discounts .
This is how factoring works for freelancers
You probably also know that as a freelancer you always have times when you have to wait for your money. Incoming payments are longed for and necessary investments in your business have to be postponed. But that doesn’t have to be the case if you opt for factoring. But how exactly does this factoring work for freelancers?
In the first step, as a freelancer, you first have to conclude a factoring contract with the so-called factor . The following information is recorded in this contract:
- the exact nature of the claim
- the maximum amount of all claims that have been purchased
- the maximum duration of the agreed payment dates
- an interest rate that you have to pay for the pre-financed bills
- the amount of the security deposit
- the agreed fee for factoring
- a fee for the credit check of the debtors , which takes place annually
- the exact scope of the service that the provider provides for factoring. These are, for example, services such as assuming the default risk or the required receivables management
Once you have concluded this contract, you give the factor all your outstanding invoices with the corresponding payment terms. In order to have less effort, you can also do this online . All invoices are then checked by the factoring provider. After the check, you will receive around 80 percent of the invoice amount. As a rule, this takes place in a time window between 24 and 48 hours. When the invoice is due, you will then receive the remaining amount, i.e. the remaining 20 percent . The factoring provider creates an invoice for you once a month in which he claims his costs for his services.
Our example of factoring for freelancers
As a freelancer and company, the customer asks you to complete his order properly and on time. In return, however, you also have the right to have your claim paid on time and to receive your money. Every employee can rely on this and it should be the same for you. It is certainly not in your interest that you have to wait for an invoice to be received every time and that your liquidity is anything but optimal. So factoring is a way out of this grievance. That would look like this, for example.
- You conclude a contract with a factoring provider.
- You hand them over your claim and have your money on the next working day. This means that you always have liquidity with which you can plan firmly.
- The factoring provider not only cares that you can dispose of your money quickly. He also takes over the dunning process for you and the risk of default for your claim.
- You can take care of your core business completely .
Conclusion – is factoring worthwhile for your job?
Factoring for freelancers can definitely be worthwhile. It certainly makes sense for you too if you have to settle a lot with commercial customers. If, on the other hand , you have primarily customers in the private segment , you will find it difficult to find a factoring provider. They very rarely buy your receivables from private customers. However, by factoring for freelancers, you can benefit from some advantages . You get your money on time, you no longer have to worry about customers not paying and you can save a lot of time and nerves by assigning dunning and debt collection procedures . You only have to pay a small fee for these factoring services, but you can always plan with good liquidity.