Although factoring is by no means a new invention, many entrepreneurs still have no experience with it. In this context, questions are repeatedly asked, of which we would like to answer the five most important ones here.
What is factoring and how can it help us achieve more liquidity?
Factoring, by definition, means a recurring purchase of receivables from transactions in goods or services. It is made against a direct payment of the purchase price, with which the risk of default is also assumed by the factor. As a follow-up customer in factoring, you sell the open receivables to the factor, which in most cases is full service factoring. This type of coverage combines three functions – financing, bad debt insurance and outsourcing of accounts receivable management.
However, the German factoring market offers many other variants – we are talking about silent, reverse and even non-genuine factoring. There are different providers who specialize in one or the other variant and can thus fulfill the wishes of the customers very specifically.
Most of the medium-sized companies put the financing of receivables, which secures their liquidity, in the first place, that is why they usually look for the full service. This makes the follow-up customers more liquid and lets them take advantage of possible purchasing benefits such as discounts. Outsourcing – the accounts receivable management is handed over to the factor – with the associated accounts receivable accounting and with the dunning process is also highly valued by many companies.
Why is factoring becoming more and more popular?
There are more than a few people who ask what makes factoring so popular, especially among medium-sized companies. There are more and more companies looking for low-cost factoring and financing solutions that are favorable for SMEs, because they need liquidity quickly and bad debts are difficult to cope with.
Therefore, the sale of receivables has become a real trend, and more and more companies are doing it. The purchase of receivables is of course not risk-free, but there are insurances in this regard that can avoid problems. Customers’ reactions to factoring vary, as some fear that they will lose personal contact and that the collection of the receivable will be completely different.
What is the difference between open and silent factoring?
In open factoring, the debtors, i.e. the customers are aware of the existence of a factoring company. Customers know that receivables of the service provider are assigned to a factor. Open factoring can be advantageous if the business relationship is intact.
In silent factoring, customers are not informed that a factoring company is operating in the background. Also, the bank details mentioned on the invoices do not indicate that there is a factor. Many customers might be spooked if they knew someone else was getting the receivables.
In addition, there is semi-open factoring. In this case, the customer is not explicitly informed about the existence of a factor, but the bank details in this case indicate it.
What are the advantages and disadvantages of factoring for a company?
- Immediate liquidity, no payment bottlenecks.
- The company commissions a third party with the receivables management, it does not have to employ any staff to do this itself. This saves time and money.
- The fees are usually very low with factoring.
- With silent factoring, the customer does not know that there is a factoring provider in the background.
- The company loses a certain percentage of sales
- Not all customers like it when the supplier hires a factoring bank to collect the receivables.
What does single factoring mean?
Single factoring means that a company sells its receivables to a factoring company on a case-by-case basis. This may be the case for very special customers or for invoices above a certain amount. Of course, the factoring company does not want to buy only the bad debts either.
Individual factoring is particularly suitable for customers who have to make advance payments as a service provider and whose customers unfortunately do not pay as quickly. This is especially popular for very large amounts. Single factoring, of course, does not mean that the company should sell only the bad debts to a factoring company. Understandably, the factor also does not want to have anything to do with receivables for which it is already clear in advance that the debtor will not pay them.
- Order Management Processes
- Reverse factoring
- Accounting processes in logistics
- Billing agreements
- Factoring examples
- Factoring – simply explained