Cash flow management: Alternative working capital financing

On May 31, 2018, the SME Future Plan 2030 was presented to State Secretary Mona Keijzer by ONL for Entrepreneurs. According to this plan, adequate SME financing is one of the five pillars for a future-oriented SME policy. Appropriate financing must be fully available for good plans and growth.

“Access to finance for SMEs has been a major problem since the economic crisis, for which there is no solution. Innovation, new plans, concepts, ideas about social challenges are shelved because the necessary funding is lacking. This has negative effects on society and the economy.” (Source: MKB Toekomstplan 2030).

Two of the recommendations to improve access to finance are to limit the claim of all collateral by banks (or other financiers) and to improve the knowledge of entrepreneurs and advisers in the field of alternative finance.

Collateral

Banks in particular usually have a knack for demanding as much collateral as possible before granting a credit. It is worth not blindly agreeing to this, because by doing so you limit yourself in attracting other forms of financing. After all, if you have given all your collateral to one financier, you can only do business with another financier if the collateral required for this is released by the first financier. And that is usually not an easy task.

Healthy

In the context of the second recommendation in the SME Future Plan and as a form of financing where only one security has to be provided, a brief explanation of one of the simplest and fastest forms of alternative financing, namely forward financing, also known as factoring. This form of financing is becoming increasingly well-known in the Netherlands. With factoring, companies receive a daily advance from a financier on outstanding invoices, which ensures optimal cash flow. Pre-financing is much less than, for example a bank loan, based on annual reports, credit ratings or business plans, but in particular on the health of the invoice portfolio. This stems from the belief that a debtor list says more about the current health of a company than an outdated annual report or promises on paper.

When are you eligible for factoring?

  • There must be a completed service or product. If you invoice afterwards, after delivery of goods or services, these are usually suitable invoices for factoring;
  • Almost all factoring companies have a minimum turnover requirement, which you must meet if you want to be eligible for factoring;
  • In addition, there are often conditions based on the (risk) profile of your customers and the pricing of the factoring offer will also be related to this.
 

You will find an informative and concise article about the different forms of factoring here. Een al wel wat ouder artikel, maar de informatie is nog steeds relevant.

In short, if you qualify for factoring, this is a very interesting and flexible way to finance your working capital.